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Get ready for the new 12.5% VAT rate!

All businesses claiming VAT back on travel or staff entertainment need to be aware of the new 12.5% rate.

In July 2020, the government temporarily reduced the VAT rate to 5% for certain supplies within the hospitality sector. This was initially for a period of 6 months but was extended as the pandemic continued to hit these businesses hard.

In the 2021 Budget it was announced that the 5% rate will end on 30 September 2021 and will be replaced with a new rate of 12.5% until 31 March 2022.

What do I need to do to prepare for the new 12.5% rate?

Most software providers (accounting and point of sale systems) will introduce the new rate. With the hard work of identifying what is subject to 5% completed in July last year it should be as straightforward as selecting the new VAT rate as there is no change to the scope of the rate.

However, there are some important points to note:

  • Any invoice raised or payment received before the end of September 2021 will still be subject to 5%, even if it relates to a booking in October or later
  • Businesses claiming VAT back on employee subsistence or staff entertainment will need to be aware of the new rate and if a simplified invoice is provided, the new VAT fraction of 1/9th should be used (but only for the items in scope)
  • Businesses on the flat rate scheme should use new rates for services supplied on or after 1 October 2021:
    • Catering – 8.5%
    • Hotels or similar – 5.5%
    • Pubs – 4%
  • Any credit notes raised after September that relate to supplies at 5% should be credited at 5%.

A quick reminder of the scope of the reduced rate of VAT

  • Hospitality – food and non-alcoholic beverages consumed on the premises, hot takeaway food and hot takeaway non-alcoholic drinks
  • Accommodation — hotels and similar establishments, caravan pitches, tent pitches, holiday cottages and similar
  • Attractions – cinemas, theatres, amusement parks, zoos, exhibitions and other similar attractions.