The Chancellor has announced a temporary cut in the VAT rate to 5% for certain supplies in the leisure and tourism sector.
The aim of the change is to boost the economy and encourage consumer spending in the sector. However it will undoubtedly cause some transitional headaches for businesses that have to change their VAT accounting.
Here are 12 FAQs that should help with the transition to the new rate.
1. What supplies are affected?
The 5% rate will apply from 15 July 2020 to 12 January 2021 on the following supplies:
- food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs
- hot takeaway food and hot takeaway non-alcoholic beverages
- sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities
- Admissions to theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities (note that if any of these attractions are covered by the existing cultural exemption, the exemption will take precedence)
2. When do I have to start charging the new rate of VAT?
For those businesses making supplies that fall within the scope, you must start charging the reduced rate of 5% from 15 July 2020. This means all takings, supplies made and subsequent invoices issued on or after 15 July 2020 until 12 January 2021 must be charged at the 5% rate.
The change in the rate of VAT only applies to certain supplies of catering, accommodation and attractions. It does not affect sales of other types of supplies and those goods or services that are charged at another rate of VAT.
3. How do I calculate the new VAT rate where prices are VAT inclusive?
To calculate the VAT amount on a VAT inclusive price, you should use the VAT fraction to work out the VAT element.
The VAT fraction for the 5% rate is 1/21.
4. What rate of VAT do I use for deposits and supplies that span the change in rate?
Where payment or a deposit has been received before 15 July 2020 but the goods/services are supplied after the VAT rate change, you can choose to charge and account for VAT at 5% on goods removed or services performed on or after 15 July 2020 (but not after 12 January 2021) even though payment has been received or a VAT invoice issued before that date. This is a special provision allowed by HMRC.
It is important to note that it is the business’s decision whether to amend the VAT rate on these prepayments that span the change. Depending on the contract you have with your customer, you may be required to pass on the VAT saving to your customers, however in most cases your prices will be shown as VAT inclusive and it will be your choice to pass on the saving or not. Note that if you choose to amend the rate and have already issued a VAT invoice showing the 20% rate of VAT, you must correct it by issuing a credit note and reissue using the 5% rate.
5. What about supplies made before 15 July 2020, but where the invoice is issued afterwards?
The general tax point rules will apply in this scenario.
The basic tax point rules are:
- Goods – the date the goods are sent or taken away by your customer or made available to your customer
- Services – the date the service is performed or completed
The basic tax point is overridden if an actual tax point is created.
- If before the basic tax point you issue a VAT invoice or receive payment for the goods/service – the tax point will be the date of the VAT invoice or the date when payment is received, whichever happens first
- If you issue a VAT invoice up to 14 days after the basic tax point, then the tax point is the date the invoice is issued
In this scenario, the new rate will apply if an invoice is issued on or after 15 July 2020 and the service or goods were supplied up to 14 days before 15 July 2020. Otherwise the standard rate will apply to your supply.
6. What rate do I use for refunds/credit notes of goods/services supplied before the change?
The rate of VAT to be used for refunds/credit notes is the one that was in force at the time of the original supply.
7. Do I have to pass the VAT reduction to my customers by reducing my prices?
As the measure is aimed at helping businesses and protecting jobs, our view is that the business should retain the VAT saving where the contract allows. However, it is the business’s decision whether to reduce its prices or not. HMRC support this view.
8. How does the VAT change affect the VAT schemes?
- Cash accounting –under the cash accounting scheme you can account for VAT when you receive payment, however the general tax point rules apply. VAT will only be due at the new rate for supplies made after 15 July 2020
- Flat rate scheme –HMRC has temporarily changed the flat rates from 15 July 2020 for the trade sectors that are affected. The updated rates are 4.5% for catering services including restaurants and takeaway, 0% for hotel or accommodation and 1% for pubs
- Retail scheme –for most retail sales, it should be straightforward. The new rate will apply to takings received on or after 15 July 2015. Some businesses that use the retail scheme may need to apportion their takings and apply the standard rate and the reduced rate where the change spans a VAT period. It will be important that the VAT rate for affected supplies is updated on till systems
- Payment on account – the rate change will not affect payments on account. However, if your VAT liability is expected to decrease by 20% or more you can write to HMRC and request reduced payments
- Annual accounting –HMRC will not change any instalment unless you expect your VAT liability to decrease (or indeed increase) significantly over the course of the year
- Tour operators margin scheme – the rate change does not affect margin scheme supplies, these supplies remain taxable at the standard rate or zero rate
9. Are there any changes to the input tax I can reclaim?
For supplies received before 15 July 2020 that are affected by the change, you can continue to claim the 20% where it has been charged correctly on the invoice.
After the VAT rate change you must ensure you are claiming the new rate on applicable supplies. If your supplier invoices you at the incorrect VAT rate, we recommend that you return the invoice to them and ask for a new invoice to be issued at the correct rate of VAT.
10. My VAT return includes invoices issued at both the old and new rate of VAT, and is due to be submitted after the new rate is introduced. What rate of VAT is due?
You will need to account for VAT at both rates, so at 20% before 15 July 2020, and 5% thereafter as charged on your sales invoices.
11. Do I have to account for VAT on the ‘Eat Out to Help Out’ vouchers?
The Chancellor announced the new Eat Out to Help Out scheme to run in August 2020.
VAT should still be accounted for on the full consideration as appropriate by restaurants, cafes and pubs that enrol for this scheme, i.e. VAT will be accounted on the full price, including the amount that will be refunded to the business.
12. What changes do I need to make to my invoicing and accounting systems?
The changes you will need to make to your invoicing and accounting systems will depend on what system you currently operate.
Please download our guide on changing and adding a new VAT rate on Quickbooks, Xero and Sage or contact our VAT or Cloud team for further support.