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.

Recent VAT cases for Rural Businesses

Chiene + Tait’s VAT Director Iain Masterton runs through some recent VAT cases that impact on the rural business sector. If you have a query about VAT, please feel free to contact us today.

Brexit

The implications of Brexit are still being debated and nothing is yet certain, though it seems that VAT, the ‘European’ tax, will still be with us for some time. Brexit will be felt by businesses that
currently trade with the EU (especially in goods), however the UK (or Scottish) Government may be free to change elements of the VAT system without having to adhere to European VAT Directives. For farms and estates, we do not envisage any major changes, at least for now.

Room Hire

HMRC won a VAT Tribunal against a hotel which confirmed that VAT was due on the hire of a room for a civil wedding ceremony, even where there was no option to tax in place.
The hotel had considered that its income from renting out the rooms for events was VAT exempt. The hotel operated under the Marriages & Civil Partnership (Approved Premises) Regulations 1995, which made it clear that the hotel provided a number of services rather than just the passive hire of a room (which are the hallmarks of a lease or licence to occupy). The Tribunal agreed that the resulting ‘service’ was subject to VAT. HMRC also consider that the supply of a room in a venue is subject to VAT if the purpose of the hire involves catering, whether this is provided by the venue or a third party. This includes receptions, breakfasts and birthday parties; and it will now include rooms for wedding ceremonies too. This differs slightly from HMRC’s policy on conferences where day delegate rates at venues can be treated as exempt (if no option to tax is in place). Long-stay delegate rates that include board and accommodation can be apportioned.

Conversions

An area where the UK Government might still provide VAT incentives is residential property. If you rent out residential property, this will be VAT exempt and any VAT incurred on renovations or repairs to these buildings is likely to be irrecoverable. Three VAT concessions exist currently which reduce the VAT cost on residential renovations by 15% to 5%. These are:

  • Renovation of a residential property which has been empty for 2 or more years
  • Renovations which change the number of dwellings after completion, and
  • Conversion of a non-residential property into residential.

If you are considering renovating existing residential properties, or converting steadings or old agricultural buildings, knowing where these VAT reductions apply can reduce the amount of irrecoverable VAT on residential property renovations. This should be established at an early stage to ensure budgets are accurate.

Cars, Vans & Agricultural Vehicles – VAT recovery?

VAT recovery depends on whether there is any private use of the vehicle and the vehicle design. VAT is irrecoverable if the vehicle meets the car ‘tests’ and if there is any private use. The following are not cars for VAT purposes:

  • Vehicles capable of accommodating only 1 person or suitable for carrying 12 or more people including the driver
  • Vehicles that don’t have roof accommodation to the rear of the drivers’ seat
  • Caravans, ambulances and prison vans
  • Vehicles of not less than 3 tonnes unladen weight
  • Special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans, and breakdown and recovery
  • Vehicles and vehicles with no side windows
  • Vehicles with a payload of 1 tonne or more.

We are seeing more vehicles with payloads of more than 1 tonne not being treated as ‘cars’ which allows a more favourable VAT treatment where there is private use. If you can demonstrate that the car is being used 100% for the business, the VAT is fully recoverable, assuming the business is entitled to full VAT recovery.

The VAT rules allow 50% of the VAT on a lease to be eligible for recovery, even where there is private use. As above, where the vehicle is not used for any private purposes the 100% of the VAT on the lease can be recovered.

Have a question about VAT, get in touch with Iain at mail@chiene.co.uk or call 0131 558 5800.

Converting a building to capitalise on ‘holiday staycations’? Read our VAT advice first!

Help for Furnished Holiday Let (FHL) owners with how to avoid an unexpected VAT bill.

With the pound in our pockets stretching less than it previously did against other currencies, many families are looking closer to home for their much-needed breaks. This has led to diversification in the UK holiday accommodation market with holiday lettings in cottages, converted barns and other “staycation” accommodation now competing with traditional hotels and bed and breakfast establishments.

Farms and estates can capitalise on this trend by utilising existing residential accommodation or converting barns and outbuildings to cope with the demand.

This article highlights some of the VAT issues associated with the provision of holiday accommodation and some VAT reliefs on works to such properties.

What is holiday accommodation?

In VAT terms, “holiday accommodation” includes any accommodation in a building, hut (including a beach hut or chalet), caravan, houseboat or tent which is advertised or held out as holiday accommodation or as suitable for holiday or leisure use, but excludes any accommodation in a hotel or similar establishment.

This definition is important as the letting of holiday accommodation is subject to VAT at 20%.  As traditional residential lettings are VAT exempt, some farm and estate business often overlook this fact.  If the farm and estate business is already VAT registered, VAT will have to be charged on the holiday rental income. If the business is not VAT registered, it will have to be mindful of the VAT registration threshold which is currently £83,000 in a 12 month period.

The imposition of a 20% VAT charge can impact on pricing particularly in areas where rates are competitive, so knowing VAT will apply at an early stage can allow the business to plan and adjust prices to maximise income and ensure that the venture makes sufficient profit.

VAT Recovery & Reducing VAT costs

One of the benefits of VAT registration and charging VAT on the holiday lettings income is that any VAT incurred on the running of the property can be recovered.  This can potentially include VAT renovation and repair costs and furnishings for the property itself.

As holiday accommodation often meets the VAT “dwellings” tests, some of the concessions available for reduced ratings on conversions and renovations to residential property are available, subject to certain conditions.  A 5% reduced VAT rate is available for conversions of buildings into residential accommodation and also for renovations to residential accommodation that has been empty for 2 years or more.  This concession is also available where changes are made to the number of “units” as a result of the work (e.g. converting one house into 4 apartments).

Whether your business is VAT registered or not, if you are considering venturing into the FHL sector we recommend you take some advice to ensure that savings are maximised and the VAT position does not impact on your profits.

If you have a VAT query contact Iain Masterton, Senior VAT Manager on 0131 558 5800 or email iain.masterton@chiene.co.uk.

VAT: Another single/multiple supply case caught in the net

This article first appeared in our Summer 2016 Rural Business Update. Download the full publication here.

A recent VAT tribunal involving a trout fishery has thrown more light upon the VAT liability of multiple supplies, a complex area of VAT law. Stocks Fly Fishery, in Lancashire, argued that they were supplying a multiple offer of standard rated fishing rights and a zero rated supply of food.

Many cases have been brought in front of the courts to decide on whether certain supplies should be classified as single or multiple supplies, and these are vitally important for the companies involved. For instance, there have been cases on delivery charges, financial advice, airport car parking, and card protection services to name but a few.

Case

Stocks Fly Fishery provide customers with sport fishing with the opportunity to take the fish away, if a premium is paid. They offer their customers two different types of ticket: a ‘catch and release’ sporting ticket with which any fish caught must be returned to the reservoir; or a more expensive “take ticket” which allows the angler to take home the fish they catch up to a limit.

The main issue in this case was whether the supply of fish for consumption was a separate supply from the supply of sport fishing, and whether a “take ticket” could be split into two separate supplies of sporting right (subject to VAT at 20%) and food for consumption (subject to VAT at 0%). Stocks argued that the price differential between the two tickets was the element subject to zero-rating.

Decision

The VAT tribunal determined that the essential feature of the supplies with both types of tickets is fishing, and that the primary motive of purchasing a ticket is to fish for sport. They were not persuaded that the dominant purpose of anyone purchasing the “take ticket” was for food consumption. At the point a “take ticket” is purchased it is not a sale of fish as there is no guarantee fish will physically be caught. There is, therefore, no distinct separate charge solely for fish; only one single charge which includes the right to fish and the chance of catching them.

The VAT Tribunal therefore found that the right to fish was the principal supply for VAT purposes, and the right to take home caught fish should be regarded as ancillary. Consequently, in this case there is a single supply of fishing which should be subject to 20% VAT.

Relevance

It is always important to determine whether bundles of supplies should be regarded as a single supply (principal and ancillary supplies), or distinct multiple supplies which ought to be treated separately for VAT purposes.

This case illustrates further development of a complex legal issue that will continue to be a concern for VAT-registered organisations. If you have a query regarding single and multiple supplies please get in touch with Iain Masterton at iain.masterton@chiene.co.uk or 0131 558 5800.