On 3 March 2021, the Chancellor announced the annual UK Budget for the coming year in an effort to kick start the economy following the restrictions imposed as a result of the Coronavirus pandemic. Amongst the package of financial support and assistance during 2021/22, the Chancellor confirmed further assistance for the tourism and hospitality sector which has arguably been the worst affected industry by the pandemic.
Temporary VAT rate extended
The UK government has confirmed that the temporary reduced rate of 5% VAT for the tourism and hospitality sector will be extended to until 30 September 2021. To help businesses manage the transition back to the standard 20% rate, the Government has also announced that a 12.5% rate will apply for the subsequent six months from 1 October 2021 until 31 March 2022. The 20% normal standard VAT rate will then be reinstated from 1 April 2022.
Summary of changes
The table below summarises the applicable VAT rate and timeline for the sectors:
|To 30 September 2021||5%|
|From 1 October 2021 to 31 March 2022||12.5%|
|From 1 April 2022||20%|
To highlight the significance of this announcement, this will be the first time since 1979 that 4 distinctive VAT rates will be in operation in the UK.
With this extension of the reduced VAT rate we consider the following key issues:
- How to operate and correctly identify the tax point in relation to supplies to determine the correct VAT rate to use.
- If your business also provides goods or services that fall outside the scope of the reduced VAT rate above such as alcohol sales, how should this be accounted for and are you paying the correct amount of VAT?
- If you are using an accounting packages (Xero, Quickbooks, SageL50 etc.) you may not have a defined tax rate for the interim 12.5% that will be used from 1 October 2021 to 31 March 2022. A new tax rate may therefore need to be added to your software package.
Special provisions are available which provide an option to maximise the use of the limited 5% reduced rate period – allowing you to choose to apply the ‘basic’ or ‘actual’ tax point. But with this flexibility it can cause complexities. Actual tax points (invoicing for a service or receiving payment) normally override the basic tax point (service completion) but the special provisions allow a choice; tax payers have the opportunity to receive cash payments and account for VAT at the reduced rate for supplies that will be taking place after end of the 5% period (so after 30 September 2021).
Consider a scenario where a hotel business supplies hotel rooms at £100 per night, 50% of the payment is usually paid for at booking and 50% at the time of the stay. A customer books on 1 March 2021 to stay at the hotel on 5 October 2021. The issue created here is that up to 30 September 2021 the VAT rate will be 5%, but from 1 October 2021 the VAT rate will change to the interim rate of 12.5%. Therefore at the time of the booking the VAT rate is 5% but at the point of stay it will be 12.5%.
The table below outlines the different VAT rates in the outlined scenarios:
|Scenario||Tax Point||VAT Treatment|
|Customer pays 50% at time of booking (1 March 2021) and then 50% at time of stay (5 October 2021)|
Payment date of 1 March 2021 will create a tax point, therefore VAT at 5%.
Second payment/actual stay will create another tax point, therefore at 12.5%
1st Payment: £50 (VAT 5% of £2.38)
2nd Payment: £50 + (VAT 12.5% of £5.55)
Total VAT = £7.93
|What if full amount was paid at time of booking (March 2021)||Date of payment – 1 March 2021, therefore 5% rate||Payment: £100 (VAT 5% of £4.76)|
|What if full amount was paid at time of visit (October 2021)||Date of payment – October 2021||Date of payment – October 2021|
Payment: £100 (VAT 12.5% of £11.11)
Unusually, and perhaps due to the nature of the legislation, there are no specific anti-forestalling measures (designed to stop people circumventing and abusing the rate change), in particular when the VAT rate increased to 12.5% from 1 October 2021 and then returns to 20% from 1 April 2022.
If you would like to discuss the impact of the reduced VAT rate on your business please contact our VAT team on 0131 558 5800 or email VAT@chiene.co.uk.