Extension to reduced VAT rate for hospitality and tourism businesses

On 24 September 2020 the Chancellor announced that the reduced rate of 5% VAT applying to hospitality, holiday accommodation and attractions would be extended until 31 March 2021. The measure was originally introduced in the summer to reduce the impact of the Covid-19 pandemic on the hospitality and tourism sector.

The extension should assist hospitality and holiday accommodation businesses over what is likely to be a difficult few months. However, while the application of the 5% rate should be relatively simple, businesses need to consider what administrative steps they need to take to continue to benefit.

Considerations for hospitality and tourism businesses

Following the announcement, businesses should consider the following:

• The income streams that will need to change.
• What the pricing policy will be.
• How you and your staff should explain the reduced VAT rate to customers.
• What practical steps will be needed, such as changes to financial systems, tills and price lists.

Should businesses pass the saving onto customers?

One important question is whether businesses should pass the VAT reduction onto customers.  There is no easy answer to this and it depends on a number of factors.

Passing the saving onto customers will be subject to any legal terms and conditions under which your supplies are made. There are also commercial implications to consider, such as the expectation of your customers.

You should therefore first identify whether there are any contracts or agreements in place for customers that dictate how you deal with the VAT. You may find you have no choice as to who benefits from the reduction.

As the extension to the VAT reduction has been given a high profile in the media, it is likely that some customers are anticipating that they will benefit from the saving. However, it is important to properly review your own situation before making a decision.

Accounting considerations for hospitality businesses

The accounting implications of the extension to the VAT reduction are complex. Businesses will need to address the following instances:

• Where payments are made before 15 July 2020 for holidays to be provided between 15 July 2020 and 31 March 2021.
• Where the holiday spans the dates of the rate changes in July 2020 and March 2021.
• Whether VAT invoices or payment request are issued to customers.
• What other services, and type of service, are being provided and at what rate they have to be charged.
• Whether or not the payment is made now for a holiday after 1 April 2021.

More importantly, businesses need to prepare calculations to reflect the adjustments necessary for the above and for their inclusion on the VAT return.

It is perhaps surprising how so many issues arise as a result of what, on the face of it, is such a simple change. However, any savings that can be made are helpful and the transitional rules are there to help the taxpayer.

Ultimately it is the taxpayer’s responsibility to account for VAT correctly. That means that business owners need to be diligent in the approach to the change, considering the impact of any decision on relations with customers.

If you would like to discuss this then please get in touch with me or your usual Thomas Westcott advisor and we would be delighted to help.