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VAT Rate Cut Further Details

The Government yesterday announced a temporary reduction of the VAT rate applicable to the hospitality sector.  The reduced rate of 5% will apply to certain transactions from 15 July 2020 to 12 January 2021.

We have updated yesterday’s note to reflect the guidance that has been released today.  We will provide further updates as and when any further guidance is released.

The temporary reduced rate of VAT will apply to:

Hospitality

  • Food and non-alcoholic beverages consumed on the premises
  • Hot takeaway food and hot takeaway non-alcoholic drinks

Accommodation

  • Sleeping accommodation in a hotel or similar establishment
  • Caravan pitches and associated facilities
  • Tent pitches or camping facilities
  • Certain holiday accommodation (other accommodation advertised or held out as suitable for holiday or leisure)

Admission charges to attractions

Shows, Theatres, Circuses, Fairs, Amusement Parks, Concerts, Museums, Zoos, Cinemas, Exhibitions, similar cultural events and facilities and online live performances (not pre-recorded).

It should be noted that where one of the above qualifies for exemption, the admission charge will remain exempt.  The 5% only applies to admission charges that were previously 20%.  It does not include sporting events.

Do I have to amend my pricing?

There is no guidance on this point yet.  The policy document released with the summer statement yesterday referred to the cut saving households an average of £160 however there has been no other suggestion that prices should be reduced and it would appear to be a commercial decision.

My prices are VAT inclusive; how do I calculate the new rate?

You will need to apply the new VAT fraction which is 1/21.  For example, if you currently sell something for £100 inclusive of VAT, the VAT to be paid currently is £16.67 (1/6).  This would be £4.76 with the 5% VAT rate.  If you plan to pass the saving on to customers, the new VAT rate should be added to the net and the new sales price should be £87.50 (£100 less £16.67 = £83.33, £83.33 x 5% = £4.17).

What do I need to do with invoices and credit notes?

The changes to the invoice will depend on the type of invoice raised.  If you do not issue VAT invoices and do not show the rate of VAT then no changes are anticipated.  Where a VAT rate is specified on the invoice this will need to be at the new rate for invoices issued after 15 July 2020.

Credit notes will need to be issued at the rate in force at the time the original invoice was issued.

I use an accounting system, what do I need to do?

Most accounting systems will have a 5% VAT rate and relevant sales in the period 15 July 2020 to 12 January 2021 should be coded to 5%.

I have already charged a deposit at 20% for a hotel stay after the VAT rate changes, do I need to do anything?

There are special rules that apply to a change of rate.  To understand the special rules, we need to first go through the normal tax point rules.

The basic tax point for services, is when that service is performed, however an actual tax point is created if an invoice is issued or payment received in advance of the basic tax point or an invoice is issued within 14 days of the basic tax point.

Under the special rules, businesses can opt to apply the rate in force at the time of the basic tax point.  For example, a business issues an invoice or receives payment before the rate change and charges VAT of 20% however the service is provided after the rate change.  The business can therefore opt to charge the lower rate in force at time of the basic tax point.  Therefore, it is possible to amend the VAT initially charged by issuing a credit note for the VAT overcharged on the original VAT invoice.

If you have any questions regarding the VAT rate changes please contact our VAT partner:

  • Watch our Video
    Watch our Video

    Highlights of the main changes

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