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VAT Rate Cut to 5% for certain sectors

The Government has 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.

Full guidance has not yet been released but it would appear the reduced rate of VAT will apply to:

  • Food (eaten in and certain take away food)
  • Non-alcoholic drinks
  • Accommodation (hotels, campsites etc)
  • Attractions (cinemas, theme parks, zoos etc)

Do I have to amend my pricing?

The policy documents state that this cut is expected to save households an average of £160 and therefore the expectation is that this VAT rate reduction will be passed on to the public, rather than retained by the businesses.  When the VAT rate changed last, businesses were allowed 28 days to amend their pricing (e.g. labels and menus) and were encouraged to apply the discount at the tills.  With this reduction being for such a short period, businesses may be allowed to leave printed documents as they are and simply apply the discount at the till.  More information will follow on this when available.

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.  Although as the saving is expected to be passed on, 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% = £4.76).

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 agreed a price in a contract, do I need to change it?

VAT Law (section 89, VATA 1994) allows for the adjustment of existing contracts to consider any later change in rate.  This is a commercial provision to safeguard the parties to contracts.  Therefore, if your contract prices are inclusive of VAT, there is an expectation that the price will need to change to take account of the new rate.  If your contract prices are exclusive of VAT, you should not need to change this other than apply the correct rate of VAT at the time of invoicing.

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 should be possible to amend the VAT initially charged however we expect more guidance to be released on this shortly.

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