Five members of our VAT and indirect taxes team have gained new customs qualifications in order to help businesses navigate post-Brexit trading arrangements. Liam Dushynsky, Ross…
From 1 October 2021, the temporary reduced rate of 5% introduced for supplies related to hospitality, accommodation, or admission to certain attractions ends. The VAT rate will instead switch to a further temporary rate of 12.5% that will apply from 1 October 2021 to 31 March 2022 inclusive. From 1 April 2022 it is stated that the reduced rate will cease to apply with all affected supplies reverting to the standard rate of VAT (20%).
Suppliers of catering services in restaurants will require some changes to EPOS / till settings on the day. However, those providing services that may involve advance payment, in full or in part and those whose supplies span the changes in rates will need to consider the VAT time of supply rules carefully.
The tax point defines the time of the supply and in-turn the VAT period in which any VAT becomes due to be included on the VAT return.
For services, the basic tax-point is when the services are performed – although for services that span more than one day it is when the services have been completed.
This basic tax point can be overridden when either payment is made in advance of the date of completion for the services or the issue of a VAT invoice – whichever happens earliest.
Using the example of a booking for a stay at a holiday park for £1800, VAT inclusive terms shown on terms and conditions / contract.
- Booking made by customer on 1 September 2021 for 7-night stay ending 20 April 2022.
- Deposit paid @ 30% (£540) on 1 September 2021
- Balance of £1260 due on 1 February 2022
- No tax invoice issued (not required as customer is not VAT registered)
In this scenario, a tax point is created on 1 September 2021 by the payment of a deposit. As this date is prior to 1 October 2021 it is subject to VAT at 5%.
A further tax point is created by the payment of the balance. As this date falls between 1 October 2021 and 31 March 2022, the VAT rate applicable is 12.5%.
If a VAT invoice had been issued for the full value of stay on 1 September 2021, the total invoice value would have been subject to VAT at 5%. It should be noted that the VAT thereon would become payable to HMRC on the VAT return covering the date of issue, so there may be implications to the business cashflow if guest payment is not required that covered the VAT element of the stay.
This scenario shows that despite the booking dates falling after 1 April 2022, the reduced rates can still apply.
The reduced rates can also be applied when issuing a VAT invoice in advance of payment and the completion of the services, but care should be taken to ensure that the detailed VAT invoice requirements are met.
Traditionally, HMRC have taken steps to prevent any degree of tax planning when a VAT rate increase has been announced in advance of the change. On this occasion HMRC have chosen not to introduce any such ‘anti-forestalling’ legislation, however they indicated that they will address any aggressive planning, for example, the issue of a tax invoice on 1 September 2021 for a holiday booked for August 2023 simply to benefit from a reduced rate of VAT.
Businesses operating the cash accounting basis, where VAT is only due upon receipt of payment may need to operate an accruals basis alongside the cash accounting method for affected supplies.
Terms and conditions issued to customers should be reviewed to ensure that the VAT treatment is consistent with the contractual obligations.
There is the option for the Government to maintain the temporary reduced rates or even introduce a longer-term VAT rate applicable to the sector but there have been no such suggestions of this to date.
If you have any questions, please contact our team of VAT specialists.