The announcement from the UK government that they are reducing the VAT rate to 5% for the hospitality sector, as well as holiday accommodation and attractions, has certainly been welcome news for businesses that have had little or no income in the previous few months.

But, as with any changes made, we do need to be careful that the rules are applied correctly. We therefore detail below the effect of the changes.

Which UK business will receive a VAT reduction?

There is a range of businesses who will benefit from the temporary reduced 5% rate of VAT. We have broken the changes down into the main three sections as follows:

  • Food and drink
  • Accommodation
  • Tourist attractions

Food and Drink

These changes will mainly affect pubs, restaurants and cafes. The change in rules results in the following treatment:

  • Eating in premises – All food and drink sales will be subject to the new reduced VAT rate of 5%, excluding alcoholic drinks which will still be charged at 20%.
  • Takeaway – Hot food and hot drinks (excluding alcoholic beverages) will benefit from the reduced VAT rate. All other takeaway food will continue to be at the same VAT rate as applied before the change was brought in.

Accommodation

HMRC have now provided further information on the types of overnight accommodation that qualify for the VAT reduction. Those that qualify for the 5% VAT rate include:

  • Hotels or similar establishments
  • Holiday accommodation
  • Pitch fees for caravans and tents

The above is relatively straightforward and it should be clear whether you can apply the 5% VAT rate to your income.

Tourist Attractions

When it was first announced that the VAT reduction would also be applied to attractions, it wasn’t clear whom this would include. I am glad to say HMRC have now provided further guidance, which I include below.

The following attractions qualify for the reduced rate of VAT for hospitality:

  • Theatres
  • Circuses
  • Fairs
  • Amusement parks
  • Concerts
  • Museums
  • Zoos
  • Cinemas
  • Exhibitions

If you are already eligible for the cultural VAT exemption then this will take precedence.

Important things to consider in relation to the VAT reduction

So, in summary, the key points to note in regards to the reduced 5% VAT rate for the hospitality sector are:

  • The changes came into force from the 15th July 2020 and will remain in place until the 12th January 2021.
  • You must ensure you account for VAT on takeaway food and drink sales correctly as the reduced rate doesn’t apply to both. For example, if you sell a cold soft drink, this should still have 20% VAT charged and if you sell cold takeaway food, you should have 0% VAT charged. For takeaway hot food and non-alcoholic hot drinks, the new reduced rate of 5% applies.
  • You must also make sure your till system is up to the task of recording the different types of income. If HMRC look at your records at a later date, the onus is on you to prove the correct VAT rate has been charged.

The government hopes that the reduced rate of VAT and the “Eat Out to Help Out” vouchers will assist in the recovery of the hospitality sector, which needs our support now more than ever before.

We hope the above has been helpful and if you have any queries in regards to the temporary VAT reduction or anything else we may not have covered in this blog, please do not hesitate to get in touch. You can contact us here or phone us on  01392 360008.