Last week the Chancellor announced that the rate of VAT, which applies to many supplies in the hospitality area, 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.
Where you can apply exemption to any such sales, these continue to be exempt. Cold takeaway food is already subject to zero rate VAT.
It is important to note that alcoholic drinks are not included. These will continue to be subject to the 20% standard rate. For some organisations this will result in the need to manage several different VAT rates going forward.
How do I calculate the new VAT rate where prices are VAT inclusive?
The VAT fraction for the 5% rate is 1/21.
What rate of VAT do I use for deposits and supplies that span the change in rate?
Where payment or a deposit has been received before 15 July 2020 but the goods/services are supplied after the VAT rate change, you can choose to charge and account for VAT at 5% but you must correct it by issuing a credit note which you would have to refund to the customer.
When is VAT deemed due to HMRC?
The tax point for VAT is the date that the VAT becomes due to HMRC
The normal tax point rules for VAT are as follows:
The basic tax point rules are:
However, special rules can be adopted for the supplies that are made around the time of the reduction. Suppliers can opt to apply the rate of VAT in force at the time of the basic tax point where this is different from the rate that would otherwise apply under actual tax point rules.
What about invoices raised or payment is made for supplies being made after 12 January 2021?
There does not seem to have been any anti-forestalling legislation put in place by HMRC. Therefore, it appears from the information that we have at present that these supplies would be at the reduced rate even though they will be made after the date the reduced rate expires.
Where such activity is taking place now, there are only a few days before these changes have effect, which doesn’t leave very much time to prepare. Some areas for you to focus on include:
We will continue to update you if and when HMRC provides further guidance.
To discuss how these changes could impact your organisation, please speak to your usual VAT team contact or Robert Warne.
COVID-19 related webinars