Reduced Rate VAT for Hospitality, Accommodation and Attractions

In July 2020, the government introduced a 5% reduced rate of VAT for businesses which supply hospitality, hotel and holiday accommodation and entry to certain tourist attractions.  This was done to support businesses who were seen as the most severely impacted by Covid restrictions.

The reduced rate for hospitality covers a range of activities including restaurants, cafes, catering etc.  It would also include most client and staff events as well as weddings, parties etc.

From 1 October 2021 the reduced rate will increase to 12.5% and from 1 April 2022 the rate will revert to 20%.

Both suppliers and consumers of these services can benefit from the reduced VAT rate.  With some advanced planning it may also be possible to benefit from the lower 5% by prepayment for some services if the events occur after October 2021 (when the VAT rate increases to 12.5%) or April 2022 (when the rate reverts to 20%).

Tax Points

Normally the tax point (and date when VAT applies) is when the service is completed.  It is possible to bring forward that date if the supplier either issues a VAT invoice or receives payment. Surprisingly, HMRC have not introduced measures to stop businesses taking advantage of the tax point rules.  This is presumably intended to assist cash strapped businesses.

Client Entertainment Event

Consider the following case.  A business knows (Covid permitting!) that it will be hosting a client entertaining event in June 2022 where the hotel accommodation and catering (not including alcohol) will cost £60,000 plus VAT. As this is client entertaining the business will be unable to recover any of the VAT.  Under the terms of the agreements with its suppliers the business normally pays a 10% deposit if booked before the end of September 2021 with the balance payable a week in advance of the event.

If in contrast, the business pays for the full amount before the end of September, a tax point arises in September 2021 and the 5% VAT rate applies. The table below shows the difference in VAT treatment

By paying for the event upfront, the business will be saving VAT of £8,100. 

Issue of VAT Invoices

As an alternative, businesses can create tax points by issuing VAT invoices.

By way of example, a hotel which generally has a busy Christmas season may consider selling accommodation until the end of 2021 and issuing VAT invoices to customers before the end of September 2021 using the 5% VAT rate.  If the hotel waits until the guest leaves in December before issuing invoices, the VAT rate would be 12.5%.  Even if customers do not pay for the hotel rooms, the hotel can still  benefit from accounting for a lower rate of VAT on sales.  However, it does mean the hotel will need to fund the VAT which will need to be paid to HMRC on its VAT return before the customer has paid for the hotel room.

Conclusion

With some forward planning the upcoming changes in VAT rates can provide an opportunity for a number of businesses operating in these sectors as well as for their customers.