Budget 2021: VAT Extension for Tourism & Hospitality Businesses

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:

PeriodVAT Rate
To 30 September 20215%
From 1 October 2021 to 31 March 202212.5%
From 1 April 202220%

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.

Key Issues

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.

Tax Points

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).

Practical Example

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 PointVAT 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% ratePayment: £100 (VAT 5% of £4.76)
What if full amount was paid at time of visit (October 2021)Date of payment  – October 2021Date 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.

New consultation on R&D tax relief: this looks to be far-reaching

This post is part of our Entrepreneurial team’s regular series of blogs.

The R&D consultation announced at the budget is far-reaching and goes much further than last year’s, in which the Government consulted on bringing data and cloud computing costs into the scope of the reliefs as well as new SME anti-avoidance measures.

This time, the consultation will look to explore further with stakeholders the nature of private-sector R&D investment in the UK and nothing seems to be off the table: it will look at definitions, eligibility and scope of the reliefs to ensure they are up-to date and competitive, while providing targeted support to maximise the beneficial R&D activity for the UK economy.

There is an emphasis into how well the reliefs are operating for businesses and HMRC, and whether this could be improved points to a positive change in the legislation. “RDEC for all” has been suggested again, potentially with a higher rate for SME’S to simplify the process.

Over-claiming is again on the Government’s radar, however, as there have been growing concerns over the past few years that this system does not provide adequate controls over the allocation of increasingly large sums of tax reliefs being given for R&D. Noting that the current 28 day turnaround gives HMRC very little time to consider every case in detail, the Government is looking to explore how the integrity of the relief process can be enhanced. This, along with the increase in the number of HMRC Inspectors being hired – as well as the HMRC taskforce announced today – points to a clampdown on fraudulent claims.

The good news is that the Government has recognised the case for widening the scope of expenditure which attracts relief, such as plant and machinery costs, which has again been brought up as an area to improve. While covered by the Research & Development Allowance, the tax benefit can be negligible in some instances, particularly when the costs fall under the scope of other available Capital Allowances. Hopefully the consultation will result in the revisit of this relief.

Overall, the announced consultation is positive news and I look forward to feeding back into this. Genuinely innovative companies shouldn’t be worried about change as the ultimate goal is to update and target the reliefs, whilst helping attract and retain key businesses in the UK.

The Budget: key points from today’s Budget speech

Much of the content of today’s Budget was trailed in advance, so there were few surprises. Indeed, the shift in news consumption (not to mention the demands of the pandemic) may mean that we say goodbye to the traditional big announcements on one day in favour of smaller piecemeal policies.

We also need to consider the impact of the ‘Tax Day’ due on 23 March. This is expected to see the publication of tax consultations which would traditionally have been published alongside the Budget. It remains to be seen how much of government tax strategy and policy will be laid down then, and how the Tax Day and Budget Day interplay.

We’ve summarised key points from today’s Budget speech below – but, as ever, the devil is in the detail so do contact us for clarification, or if you have any questions.

Corporation tax rates

  • Corporation tax to rise from 19% to 25% in April 2023
  • Rate to be kept at 19% for about 1.5 million smaller companies with profits of less than £50,000
  • Companies with profits between £50,000 and £250,000 will be subject to tapered rates

Personal tax rates

  • Personal income tax allowance frozen at £12,570 from April 2021 until 2026
  • Higher rate income tax threshold frozen from 2021 until 2026
  • No changes to inheritance tax nil rate band, lifetime pension allowance or capital gains tax annual exemptions until 2026
  • No mention of any increases to capital gains tax rates or inheritance tax reliefs despite much discussion on these prior to the Budget

VAT and duty

  • No changes to the main VAT rate
  • The VAT rate reduction to 5% for the hospitality industry has been extended until 30 September; thereafter, an interim rate of 12.5% will apply until April 2022
  • No change to the VAT registration threshold of £85,000 until April 2024
  • Planned increased to alcohol and fuel duties cancelled

EIS and R&D tax

  • The EIS system will be reviewed this year to enhance the benefit it brings
  • A consultation on R&D tax relief to ensure its is up-to-date and competitive

Tax reliefs in investment

  • A new ‘super-deduction’ form of capital allowances which will allow incorporated businesses to deduct 130% of expenditure that would normally qualify for main writing down allowances

Loss relief

  • Enhanced loss reliefs for businesses, both incorporated and unincorporated, to allow carry back of losses against earlier years’ profits

Brexit

  • Eight freeports to be established in England

COVID funding

  • Multiple initiatives relating to COVID in the Budget, from an extension of the furlough scheme to new grants for non-essential businesses
  • Sector-specific funding packages announced for the arts and sports
  • Business rates in England will continue their holiday until June, with a 75% discount thereafter
  • Access to grants for self-employed people is to be widened

Tax planning ahead of Spring 2021 Budget

As we approach the end of 2020 we can reflect on a tumultuous year as a result of the Covid-19 pandemic. As seen recently in the financial press, there are a number of speculative discussions about possible future tax increases. While tax increases are possible, it is also clear that the Government will need to take steps to encourage investment, to boost the economic recovery.

At this time, we can only speculate about possible tax changes in 2021 however, we do know that changes to taxation will be announced in the Spring Budget, which will take place on 3rd March 2021. Rather than leave the usual year-end tax planning until February next year, it would be prudent to bring forward this process. If you are anticipating a quieter than usual festive period, it could be the perfect time to turn your attention to financial matters.

The Chiene + Tait Tax Team has flagged some areas that may be of interest to you or your business including gifting of assets to members of your family, pension planning if the higher rate tax relief is removed from contributions or what to look out for if you are thinking of selling your business.

Our infographics below highlight further areas for consideration. If you would like to discuss selling your business, please contact Jonathan Griffiths, if you would like to discuss any tax aspects for your family, please contact Michelle Fallon or Moira McMillan. Alternatively, please email us at mail@chiene.co.uk, we would be delighted to discussion the options available to you, your family or your business.

Areas families to consider Spring 2021
Family areas to consider ahead of 2021 Budget
Business areas to consider 2021 Budget
Business areas to consider ahead of 2021 Budget

VAT Rate Cut

The Chancellor Rishi Sunak has announced a temporary 5% VAT rate which will come into effect from 15 July to 12 January 2021. The main areas which will be affected are:

  • Sales of Food and non-alcoholic drink in restaurants, pubs, bars, cafes and similar premises;
  • Hot takeaway food and non-alcoholic beverages;
  • Sleeping accommodation in hotels, B&B and similar accommodation including holiday accommodation, pitch fees for caravans and tents and associated facilities; and
  • Admissions to tourist attractions such as theatres, concerts, amusement parks etc.

The changes are not limited and will impact on any businesses or organisation that provide food or drink, accommodation, or are considered a tourist attraction. For more details visit our VAT page here. Or download our free VAT Rate Cut Factsheet here.

If you have a query about the VAT rate change, contact our team today at vat@chiene.co.uk.

Summer Statement 2020: Main Points

Chancellor Rishi Sunak today outlined a series of measures aimed at restarting the economy after the recent impact of the COVID-19 pandemic. Key points delivered in his speech were:

  • Stamp Duty holiday – a temporary holiday on stamp duty, on the first £500,000 of all property sales in England and Northern Ireland, effective immediately.
  • The launch of a new “Kickstart Scheme” to create more jobs for young people – a six-month work placement for people on Universal Credit between 16 – 24 who are at risk of long-term unemployment.
  • The launch of a “Job Retention Bonus” – the Government will pay employers a £1,000 bonus for every staff member kept on for three months once the furlough scheme ends in October.
  • VAT cut from 20% to 5% – on food, accommodation and attractions starting 15th July until 12th January 2021. Watch out for more details on the VAT cut from our specialist team shortly.
  • A new ‘Eat out to help out’ discount – will give people 50% off meals in participating restaurants on Monday-Wednesday throughout August, up to £10 per person.

Other announcements made before Chancellor Sunak’s speech in the Commons include:

  • Grants to help homeowners and landlords in England as part of a green investment package – will receive vouchers of up to £5,000 for energy-saving home improvements.
  • Organisations working in the arts and culture sector across the UK are to receive £1.57bn in grants.
  • A pledge to provide 30,000 new traineeships for young people in England, giving businesses £1,000 for each new work experience place they offer.

Details about the VAT rate cut can be found here.

 

 

Do drivers dream of electric cars?

(This article on electric cars first appeared in the Winter 2017/18 edition of our Connect newsletter.)

It will now cost you £21.50 to drive into central London if your car is more than 10 years old. If it’s a diesel, by next April it could cost you £24. Edinburgh and Glasgow councils are considering their own congestion charges with additional charges for diesels – £20 a day is proposed in Edinburgh – which could be in effect by 2020. And certain councils have already introduced additional parking charges for cars with diesel engines.

The UK Budget also sought to discourage diesels: new diesel cars face being put in a higher VED band, and drivers of diesel company cars will face a 1% increase in company car tax.

Benefits for company electric cars

Meanwhile, electric vehicles are being encouraged through benefits in kind taxation on company cars. A taxable benefit in kind is due for employees who are provided with a company car, with a corresponding National Insurance charge for the employer. The taxable benefit is the list price of the vehicle multiplied by a percentage tax rate HMRC created based on the car’s carbon dioxide (CO2) emissions.

This means that electric cars and Ultra Low Emission Vehicles (ULEVs) incur reduced benefit in kind percentages, with vehicles omitting 0-50 CO2 g/km benefitting from rates as low as 9% (13% from 6 April 2018). Typical petrol vehicles will be subject to rates of 17% – 37% this tax year, with the lower rate increasing to 19% from 6 April 2018. Diesels incur an extra 3% surcharge.

A subtle but advantageous provision from this Autumn’s budget is that no benefit in kind will arise where an employer allows an employee to charge a company car at work. For petrol vehicles, the provision of company fuel can often lead to increased income tax and National Insurance charges which can, at times, be higher than the actual cost of the fuel provided due to a fixed rate fuel amount being multiplied by the car tax percentage. Electric cars and ULEVs can also benefit from salary sacrifice, following changes in April 2017 that restrict new schemes to cars with emissions of 75 CO2 g/km or less.

The head-to-head: electric vs petrol

The i3, BMW’s flagship electric vehicle, retails at around £30,000. The i3 would give rise to a taxable benefit in kind of £2,700 for this tax year, while a corresponding petrol 3 Series saloon, with the same list price and CO2 emissions of 102 g/km, would incur £5,700. Choosing the i3 would save the employee £3,000 per year at their marginal rate of income tax and mean a reduced National Insurance charge to the employer.

The future

This year, Volvo announced that it will make no new cars with petrol or diesel engines from 2019: everything it manufactures from then will have a hybrid or solely electric engine. The UK Government said that all new petrol and diesel engines will be banned from 2040, mirroring France (but 10 years later than Paris, which will ban these engines by 2030). Tesla announced an electric lorry that, they say, will be 20% cheaper to run than a diesel equivalent. Elon Musk predicted that running a diesel truck would soon be “economic suicide”.

There remain issues with widespread electric car take-up – not least the need to charge millions of cars in millions of locations – but problems with the technology and infrastructure are being solved at a rapid pace. The current direction of travel seems to be firmly set: it may be wise to consider an electric future.