Ellen Main-Jeffrey, Head of VAT Services, at Burgis & Bullock assesses the change to VAT rates for hospitality and tourism businesses in her latest blog.
The support for hospitality businesses through the Covid-19 pandemic continues albeit at a “higher” reduced rate.
The 5% reduced rate introduced in July 2020 for hospitality and tourism businesses increased to 12.5% on the October 1 2021 and it returns to the standard rate of 20% on April 1 2022.
By way of a reminder, the reduced rate covers meals and non-alcoholic drinks sold in pubs and restaurants, hot take-away food, hospitality services such as those provided in hotels, bed and breakfast and self-catering establishments and admission charges to attractions.
Interestingly, HMRC does not see it applying to room service meals supplied in hotels. Instead, only to meals served in the restaurant and bar areas and it doesn’t apply to catering services where the food is supplied for consumption off-premises.
For example, food prepared by a chef in your own home or a complete wedding package.
How you deal with these changes in VAT rate requires careful thought as businesses rarely have to deal with so many changes in the VAT rate applying to their supplies in such a short time.
The rate of VAT applicable depends on the time of supply – or the tax point.
Generally, for services this is the time they are performed and when payment is received, for example when the meal is served and when you check out of the hotel.
However, sometimes it happens quite a bit earlier for example when you pay for your ticket or when you pay a deposit in advance.
If the date of payment is earlier then your supplies could span the change in VAT rate, but the lower VAT rate will only apply to the extent of the payment received before the VAT rate increases.
In practical terms this would mean the deposit paid in February 2022 for your summer holiday cottage rental would be liable to VAT at 12.5% whereas the balance due say in April, will be liable to VAT at 20%.
If the business chooses to pass the benefit of the reduced rate on to the customer, they could use this differential to encourage customers to pay the rental charge in full before the rate increases to the standard rate of 20% on 1st April.
Other practical aspects to consider include:
- Setting your prices to ensure you cover the increased VAT – do you need to increase your prices?
- How do you calculate the amount of VAT included in the VAT inclusive price? The VAT fraction you apply to the VAT inclusive amount for a rate of 12.5% is 1/9.
Are you sure your accounting staff and accounting systems are fully prepared for the changes in rate?
Don’t hesitate to contact Burgis and Bullock if you need any help.