UPDATED: VAT changes for hospitality, holiday accommodation and certain attractions: your questions answered
One of the more eye-catching announcements of the Chancellor's recent economic update was a reduction in VAT for sectors particularly hard hit by the COVID-19 crisis. Tax Consultant NICK GILES provides some greater detail and clarity.
I saw on the news the Chancellor has reduced VAT for the hospitality sector. What exactly does that apply to?
The measures introduced by the Chancellor will reduce VAT from the standard rate of 20% to the reduced rate of 5% for a range of supplies in the hospitality sector. These will include:
- food and non-alcoholic drink from restaurants, cafes and pubs, including both food and drink consumed on the premises and takeaways;
- accommodation in hotels, guesthouses, holiday lets or campsites; and
- entry to theatres, circuses, fairs, concerts, museums, zoos, cinemas and exhibitions.
When does the new rate apply?
In July, the VAT rates for the hospitality and tourism sectors was reduced from 20% to 5%. This was due to expire in mid-January 2021, but it has been extended until 31st March in order to help the struggling sector free up some cash-flow and protect jobs.
I took a deposit for my holiday let in June and charged 20% VAT on the invoice. How do I treat the remaining balance when the guest pays before their stay in August?
In the case where a deposit has been received before 15 July, but the goods or services are not going to be supplied until after 15 July, you can treat both the deposit and the subsequent supply as a reduced rate supply. You can issue a credit note for the original standard- rated deposit invoice and re-issue a new invoice at the reduced rate. The subsequent stay should then also be charged at the reduced rate.
What should I do for supplies I have already made but not yet invoiced?
As a general principle of VAT, the basic tax point for goods is when they are made available to the customer and for services it is when the service is performed or completed. This basic tax point can be overridden by an actual tax point, which can be created in one of two ways. You can take the point a payment is received or when an invoice is raised – whichever is the earlier – provided the invoice is raised within 14 days of the basic tax point.
In most cases, this will mean a supply made before 15 July will be liable to the original standard rate. However, for supplies made on or after 1 July, provided payment has not already been received, an invoice can be raised up to 14 days later and would create a tax point of 15 July or later. In these situations the invoice should be raised applying the new reduced rate.
My business is not VAT registered. Will this affect us?
The new changes will have no effect on the prices you charge but you may find some of your costs are reduced. This may also be a good time to re-evaluate whether it may be worthwhile to register your business for VAT.
VAT registration is currently compulsory for businesses with a taxable turnover of more than £85,000 but there is an option for businesses with a turnover below this level to register for VAT voluntarily. One advantage of being VAT registered is that your business can reclaim the VAT incurred on its purchases but some businesses worry that this can be outweighed by the requirement to add a further 20% to their prices, which could potentially make them uncompetitive and impact their sales.
With the rate of VAT being reduced to 5%, this price increase will not be as pronounced, and it may even be possible for the business to absorb the additional cost itself and still come out on top after they have reclaimed VAT on their costs.
It should also be noted that VAT can be reclaimed on services supplied up to six months before registration and on goods bought up to four years before registration, providing the goods are still owned by the business on the date of registration.
You can voluntarily cancel your VAT registration at any point provided you do not expect to make taxable supplies in excess of £85,000 in the next 12 months.
Will I have to make any changes to my accounting software?
Yes, you will need to adapt your accounting software and invoicing procedures to reflect these changes. Your accountant will be able to advise you on the appropriate course of action for your accounting system.
If you would like any advice or any information, please contact us on 0115 955 5500 or email enquiries@pagekirk.co.uk.