The hospitality industry has been particularly badly hit by Covid-19 so, in a bid to protect jobs, the Chancellor has cut the rate of VAT from 20% to 5%. Understanding this recent VAT cut will be crucial in helping your business succeed.
This reduced rate applies from 15 July 2020 until 12 January 2021 and represents a £4 billion investment.
Essentially, the 5% VAT rate will be levied in three key areas:
Food and drink
Food and drink sold by cafes, pubs and restaurants and consumed on the premises will be subject to the 5% rate, except alcoholic drinks, where the rate remains 20%. For takeaway sales, only hot food or hot (non-alcoholic) drinks are subject to 5% VAT.
Take, for example, the sale of a bottle of beer, a cappuccino, fish and chips, a ham sandwich and a packet of crisps. If sold in a pub or restaurant everything except the beer will be subject to 5% VAT. With takeaway sales the situation is different – the crisps are standard rated and the sandwich is zero-rated.
Check VAT Notices 701/14 Food products and VAT, and 709/1 Catering, takeaway food, which have been updated.
The 5% rate applies to hotels, campsites, caravan parks, etc.. The key point to be aware of is the treatment of a deposit that was received before the rate change but where the stay takes place afterwards. The rules state that the deposit can be subject to 5% VAT, but this is at the discretion of the business owner.
Further guidance is available in VAT Notice 709/3 Hotels and holiday accommodation.
The government confirms that the following are classed as an ‘attraction’ and entry is therefore subject to the 5% VAT rate: shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions along with similar cultural events and facilities. Sporting events, however, are excluded.
Remember that under the cultural exclusion, typically associated with public bodies and not-for-profit organisations, admission to some facilities is already exempt from VAT. This exemption takes precedence over the 5% rate.
Full advice is available in a new document: VAT on admission charges to attractions
Mixed supplies always present a challenge. HM Revenue and Customs (HMRC) offers help using two examples of supplies where more than one rate of VAT applies, usually 20% and 5%.
For instance, the entry fee for a brewery tour will be subject to 5% VAT, even if it includes an element of food and drink. This is the case so long as the food and drink is deemed ‘incidental’ to the tour. However, if eating and drinking was the main priority, the entire package would be subject to 20% VAT. HMRC accepts there will be grey areas and expects suppliers to adopt a reasonable approach in demonstrating that supplies qualify for the 5% rate.
Flat Rate Scheme (FRS)
HMRC advises that the relevant flat rate percentages for the various business types impacted by the reduced rate, such as ‘catering services including restaurants and takeaways’ and ‘hotel or accommodation’ will undergo a temporary adjustment.
Further information on the VAT rate cut is available in Revenue and Customs Brief 10/2020
For tax advice call our specialist team on 01785 243276.