The Chancellor, Rishi Sunak, today announced that the rate of VAT, which applies to many supplies in the hospitality and tourism industry, will be reduced from 20% to 5%. This is part of the wider ‘Plan for Jobs’ initiative, which aims to support businesses bounce back from the impact of the COVID-19 pandemic. It also follows similar steps taken by other EU governments.
The reduced rates of VAT will come into effect from Wednesday 15 July 2020 and continue until Tuesday 12 January 2021. This should help ensure that a delayed summer season and the busy Christmas period can both benefit from its impact.
The hospitality industry will benefit from the lower 5% rate being applicable to the supply of eat-in and hot takeaway food and non-alcoholic drinks. This reduced rate can be applied by restaurants, cafes, pubs and similar venues.
At the moment all of these supplies are subject to the standard 20% rate of VAT. Cold takeaway food is already subject to a zero rate of VAT, hence its exclusion from this provision.
It is important to note that alcoholic drinks are not included. These will continue to be subject to the 20% standard rate. For some businesses this will result in the need to manage several different VAT rates going forward.
Supplies of accommodation and entry to attractions will benefit from the reduced 5% rate of VAT. Hotels, bed and breakfasts and campsites will be able to benefit from this when people stay with them while theme parks, zoos and cinemas will enjoy a lower rate of VAT on their entry fees.
These temporary VAT rate cuts are budgeted to cost the Treasury just over £4 billion. While there should be a benefit for consumers, it might be that the biggest winners are in fact the businesses making the supplies. This will definitely be the case if lower rates of taxation are not passed onto consumers in the form of price reductions.
However, those businesses which will see the new rates affect several different supplies or end up with multiple rates will face some administrative burdens manging that situation. For instance, a bar could now find itself having to manage three different rates of VAT across the products it sells – alcoholic drinks at 20%, eat in food at 5% and cold takeaway at 0%. This will make it more difficult to calculate the right amount of VAT to declare.
There are only 6 days before these changes have effect, which doesn’t leave very much time to prepare. Some areas for businesses to focus on should include:
Complete details on the changes and how they will apply are to be announced by HMRC in the coming days. It is hoped this will be soon to maximise business’ time to make any required changes or put in place new procedures. We will update this notice to reflect that information as it is released.
To discuss how these changes could impact your organisation, please speak to your usual VAT team contact, Robert Warne or Robert Marchant.
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