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Reduced rate of VAT – hotel sector

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.

In broad terms the reduced rate applies as follows;

  • The supply of food and non – alcoholic beverages for consumption on your premises
  • Sleeping accommodation

Premises for this purpose will include the hotel buildings and grounds.

How will the reduced rate apply to supplies commonly made by hotels?

  • Sleeping accommodation – The supply of sleeping accommodation will qualify for the reduced rate.
  • Rooms supplied for catering – If you supply a room for the purpose of catering this will qualify for the reduced rate. It does not matter whether the catering is supplied by you or someone else. Note: the reduced rate does not apply to rooms supplied for other purposes such as conferences or weddings for example.
  • Restaurant – The provision of breakfast and meals in the restaurant will qualify for the reduced rate. The supply of non – alcoholic drinks with meals will also qualify for the reduced rate.
  • Room service – The provision of meals and non – alcoholic drinks in guest bedrooms will also qualify for the reduced rate
  • Bar sales – The supply of non – alcoholic drinks and meals for consumption in the bar will qualify for the reduced rate. This will also include crisps, nuts etc

Sales with mixed liability

  • Meal deals eg 2 course meal and glass of wine for £20 – If you offer a promotion in the restaurant for one price the price can be apportioned to reflect the meal element at the reduced rate and the alcoholic drink element that will remain standard rated.
  • Drinks eg Gin & Tonic £5: If held out for sale as a single supply the sale will be wholly standard rated. However, if the gin and the tonic are sold separately then the tonic should qualify for the reduced rate.
  • Wedding packages: If you supply a package of wedding services (including, for example, use of rooms for a ceremony, wedding breakfast and evening party), this is a single standard-rated supply, regardless of whether the catering is supplied by you or someone else. Between the 15 July 2020 and 12 January 2021, if the catering is provided in house as a separate supply, it may benefit from the temporary reduced rate subject to the rules on single and multiple supplies.

Other common questions

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 ie the date a room is booked. However, an actual tax point is created if an invoice is issued or payment received in advance 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.

Example

Booking taken May 2020 for a stay in August 2020 – cost £150 inc 20% VAT

A deposit of £60 is taken at the time of booking

The balancing £90 is due on arrival

The basic tax point is the date of stay – August 2020.

Under normal tax point rules VAT would be due as follows;

Deposit £10 (£60×1/6)

Balance £4.28 (£90 x1/21)

If special tax point rules applied VAT would be due as follows;

Deposit £2.85 (£60 x1/21)

Balance £4.28 (£90 x1/21)

I have taken a booking between 15th July 2020 – 12 January 2021 for a stay in March 2021

Again, we need to consider the tax point rules. The basic tax point is March 2021. If a deposit is taken at the time of booking an actual tax point is created.

Example

Booking taken October 2020 for a stay in March 2021 – cost £150 inc VAT

A deposit of £60 is taken at the time of booking

The balancing £90 is due on arrival

VAT is due as follows;

Deposit £2.85 (£60 x1/21)

Balance £15 (£90x 1/6)