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Preparing for the 12.5% VAT rate

Adam Cutler, Director, VAT
31/08/2021
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From 1 October 2021 the VAT rate applied to hospitality changes to 12.5%. This will require preparation not only by suppliers in those sectors, but by all organisations that can recover some VAT on employee expenses. It may also affect future holiday plans for individuals and could have wider repercussions for other sectors.

From 15 July 2020 VAT has been chargeable at 5% on:

  • on-premises catering and non-alcoholic drinks sold with catering
  • hot takeaway food and drinks
  • admissions to attractions including theatres and amusement parks
  • hotel and holiday accommodation.

This was always intended to be a temporary measure to boost the hospitality sector at this difficult time. Rather than return to 20% VAT in one go, the VAT rate applicable to these goods and services will change to 12.5% where these are supplied between 1 October 2021 and 31 March 2022.

It should be noted that none of the above affects situations where no VAT is chargeable, such as cold takeaway food.

Suppliers

Anyone supplying these goods and services will need to prepare their tills and accounting systems to cope with these VAT changes. Suppliers will also need to consider how much of this VAT rise they will pass on to their customers.

This will not just be those suppliers in the hospitality sector, but would cover situations such as care homes and colleges that sell meals to visitors.

This may be particularly challenging as 1 October 2021 falls on a Friday, so changes to prices and systems may need to be made overnight.

If you are providing goods and services around the date of the rate change, it is the tax point that will determine which VAT rate to apply. The tax point is usually the earlier of invoicing, payment or provision of the goods or services – and for most hospitality activities this will be the same date. However, if you issue an invoice within 14 days of this basic tax point, the invoice date becomes the tax point. The upcoming change in October (and in March 2022) is therefore one of those rare cases where customers should welcome being invoiced in advance.

Customers

If you can recover VAT on items such as employee hotel trips and subsistence, you will need to change your systems to ensure that the correct VAT amount is picked-up after 1 October 2021. Most organisations will need to create another VAT code in their accounting system and alert the purchase ledger team to watch out for the VAT rate applied to these items.

Individuals

It is an old adage that the best cure for post-holiday blues is to book another holiday, but this may also make financial sense this year. If you are planning to holiday in the UK next year and your supplier invoices you before 1 October 2021, they are able to apply the 5% rate. The same applies if you planning a wedding or other big event next year – some hotels are already showing higher prices for bookings after September.

This was an accepted feature when the government brought in these temporary rules and is intended to advance cashflows to this challenged sector.

Wider implications?

Since the UK left the EU, the government has had more flexibility over changing VAT rates for certain products, and has begun to use this power. However, moving from 20% to 5% or zero VAT is clearly expensive for the Exchequer. Might the government be persuaded more readily to reduce the VAT rate on certain items to 12.5% - perhaps again on a temporary basis to encourage take-up?

Obvious candidates would be costly green measures not covered by existing VAT reliefs, such as installing double glazing and buying an electric car. Several sectors who had given up lobbying for a rate change in the past may now wish to think about this again.

If you would like to discuss this further please get in touch with your usual Crowe contact, Rob Marchant or Rob Warne.

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Contact us

Robert Warne
Rob Warne
Partner, Head of VAT and Customs Duty services
London
Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services
London