In July of last year, an emergency budget was announced which saw Rishi Sunak introduce a temporary 5% rate of VAT which applied to most supplies made by the hospitality sector.
This included cafes, restaurants, pubs, hotels, tourist attractions and more.
This 5% rate has been applicable ever since but will increase to 12.5% on 1 October 2021. This will then subsequently revert to the standard 20% rate on 1 April 2022.
However, if you plan correctly, you may be able to take advantage of the lower VAT rate for sales after October 2021.
Planning for change
It must be said that after a very unexpected couple of years it can be difficult to plan, and often HMRC create legislation to prevent that when rules are due to change.
In this situation there is no anti-forestalling legislation.
Due to this, if a business was the receive an advanced payment, before 1st October, for a supply after this date, the rate of 5% will still apply.
This is because it is based on the payment date. This is in line with normal tax rules where the tax point is based on the invoice or payment date, whichever comes first. Had HMRC created legislation, the supply date would have to be taken into consideration, or the payment date if using the cash accounting scheme.
At this point, we think it is important to add that this isn’t an unknown loop hole, HMRC have confirmed that they have not published anti-forestalling legislation intentionally in a bid to further help the hospitality sector.
How can it help?
If you are in the hospitality sector and sell your goods and services on a VAT inclusive basis, then encouraging customers to pay before 1 October will directly increase the bottom-line profit of your business.
This is because your price post 1st October will be inclusive of 12.5% but you will only be paying 5% over to HMRC.
For example, city centre hotels are busy early December with Christmas parties, so £500 including VAT for two night’s bed and breakfast accommodation will have a VAT liability for the owner of £23.81 if paid before 1 October and £55.55 thereafter.
This means a difference of £31.74 which would be kept within the business for each room that was paid in advance.
Another example from a consumer’s perspective would be an office Christmas dinner which may be quoted on a VAT exclusive basis. As a business you might be able to claim input tax if they treat it as a staff party, but don’t forget alcohol is not included in the temporary reduced rate.
In this case a restaurant could encourage advance payment with a VAT incentive: “Pay for your table or seat before 1 October and you will save 7.5% VAT.”
Whether you are the supplier or the consumer there is an advantage to both parties. One will save the VAT and one will increase their initial cashflow.
Act now!
The change in VAT rate is roughly 6 weeks away so if you are planning something after this date why not try to negotiate a better price.
Alternatively, if you are a supplier, this could be a great opportunity to secure bookings early with some customer discounts that will not impact on your bottom line.
If you are in hospitality or have read anything you would like more information on, please call us on 01482 888820, our team are ready to help!