Rishi Sunak’s announcement that supplies in the hospitality sector will temporarily be subject to the 5% rate of VAT has been generally welcomed.
Which businesses does the rate change apply to?
The announcement appears to be targeted at those businesses providing catering (other than the supply of alcohol), accommodation to travellers, and admissions to attractions/venues such as theme parks, zoos and cinemas. HMRC have since issued some guidance which details which attractions could be subject to the lower rate of VAT, even suggesting that some online events might be subject to the lower rate of VAT.
When does the VAT rate change apply? – Issues for those providing accommodation
One of the main question that businesses in the hospitality sector will ask is in respect of when the new rates apply.
For those providing catering and admissions, the answer should be relatively simple. The tax point rules mean that payment is received at the same time as the supply. This means that any supplies of food / admission made between 15 July 2020 and 12 January 2021 will be made at the 5% rate of VAT.
There could be more of an issue in respect of businesses providing accommodation or other businesses in the hospitality sector which take deposits.
The normal tax point rules state that the basic tax point is when a supply is actually made (e.g. for accommodation when the traveller actually stays in the hotel).
However, an actual tax point is created (and usually takes precedence) when payment is made (i.e. a deposit). Under the normal rules this would mean that a deposit taken before 15 July 2020 would be subject to 20% but the remainder of the payment for a stay during the 15 July to 12 January 2021 period would be subject to the 5% rate of VAT if payment was received after 15 July 2020.
Clearly, this may mean that businesses providing accommodation are approached by their customers asking for a refund.
A business can issue a credit note in relation to the deposit so that VAT is charged at the 5% rate of VAT if the actual supply will be made between 15 July 2020 and 12 January 2021.
Though the guidance is hard to follow it is set out at section 30.7.4 of HMRC’s VAT Notice 700 here. The credit note needs to be issued within 45 days of the VAT rate change.
Alternately if the business does not elect to issue the credit note then it could justify treating the deposit as chargeable at the 20% rate.
If a credit note is issued, then the VAT amount would need to be paid back to the customer in order for the credit note to be valid. However, presumably the VAT amount could be set off against the additional payment due.
Recording VAT liability – restaurants and catering
The VAT rate change applies to eat in catering and hot take-away food. However, it does not apply to the sale of alcoholic drinks (and presumably does not apply to cold takeaway food which would be standard rated such as confectionery).
This means that businesses providing catering will need to set up their systems to record those sales which are standard-rated and those which are subject to the 5% rate of VAT.
At present it is assumed that when the Eat In to Help Out Scheme is introduced in August VAT will still be due on the full selling price of the meal rather than the discounted price (however the exact nature of the scheme is not yet known).