One of the main measures announced by the Chancellor in his economic statement was the reduced 5% Vat rate for the hospitality sector. We layout below more detail on this and also the possible changes you may need to make to ensure this is applied correctly.

What is the purpose of the measure?

Clients have been contacting us asking whether they should be reducing their prices to take account of the lower VAT rate.

We do not think the measure is a customer support measure but rather a business one. On that basis you should not feel you have to drop your prices.

However, from a customer perspective, we all know what they can be like at times and they are likely to expect something. Therefore maybe you could implement one of the following measures;

  • As a pub or restaurant you could offer a free drink with each meal purchased.
  • If you are a hotel or caravan park offer a 10% discount off their next booking.
  • A small reduction in prices being less than the 15% reduction in VAT.

You could also consider communicating the measures you have put in place to keep your customers safe and your employees in work such as;

  • Cost of providing PPE to all employees
  • Having to reduce capacity to comply with government guidelines
  • Providing hand sanitiser for all customers

Not all customers are business minded so won’t have thought of the above. Hopefully they will be a lot more understanding once they consider the implications the virus has had on your business.

It may be that a combination of the above will keep your customers happy and appreciative of the hard work you have put in place to keep them safe.

Who and what does this effect?

The reduced 5% rate will apply to the following establishments;

  • Restaurants
  • Pubs
  • Cafes
  • Bars
  • Providers of accommodation and attractions

If you don’t fit into the above but are in a similar sector it may still apply to you and if you are unsure please let us know.

The above rate will apply to food and Non Alcoholic drinks and the provision of accommodation and attractions.

When will this take effect?

The measures will apply from the 15th July 2020 to the 12th January 2021.

Specific points to consider

We list out below items to consider ahead of the change;

  • As a pub you will now need to record separately your alcoholic and non-alcoholic sales.
  • If you have taken deposits for supplies that span the change in rate, which rate should you use? HMRC are yet to clarify the transitional rules although we would expect the following to apply;
  • Goods – if you take a deposit or payment for goods but won’t supply the good until after the VAT rate change, I would have thought it likely you will be able to choose the new VAT rate.
  • Services – If you supply a service after the rate change but have already taken a deposit, I would again have thought you will be able to charge the new rate
  • If you need to issue a credit note the rate you apply should be the one in force on the date the original invoice was raised.
  • When you receive income in relation to the new governments “Eat Out to Help Out” vouchers VAT will need to be accounted for on them as usual at the new rate of 5%.

How do I account for the above?

If you use software such as Xero we would expect them to update their system to include a 5% VAT rate which can then be applied when recording your sales.

If you do not then you will need to apply the following;

  • VAT exclusive price – times the NET price by 0.05
  • VAT inclusive price – divide this by 21


I hope you find the above useful and we will of course update you as soon as HMRC release more information.

As always, if you have any queries please get in touch – 01392 360008