Reduced VAT rate for hospitality and tourism businesses

As the government is now easing lock down measures, the Chancellor has attempted to reinvigorate the hospitality sector

Reduced VAT rate

In order to do this. The government has introduced a temporary reduced VAT rate (down from 20% to 5%) on the following items:

  • Food
  • Drinks
  • Accommodation

How long is the reduced VAT rate in force?

This VAT reduction for the hospitality and tourism sector will apply in England, Scotland, Wales and Northern Ireland for the period 15 July 2020 to 12 January 2021.

HM Revenue recently published some additional advice on this temporary VAT rate change which can be found here.  As a result of these new guidelines, the Chancellor anticipates this will benefit customers and businesses alike. If you do operate a business in this sector you could use this as an opportunity to reduce your prices to attract customers.

Do you need to pass on the VAT saving to customers?

You are not legally obliged to use the rate cut to benefit customers. So you might therefore prefer not to pass on the saving and keep the additional 15% VAT for working capital in your business.

The Chancellor has emphasised that the reduced VAT rate applies only to supplies of foods and drink, accommodation and admission to attractions. Any goods/services which are provided to those in the hospitality and tourism industry will still be taxed at the standard rate of 20% VAT.

We'll now cover the detailed aspect of this temporary reduced VAT rate and how this impacts on  hospitality and tourism businesses  in more detail below.

Hospitality businesses

Between the dates listed above the supply of the following items will be taxed at the reduced VAT rate:

  • Food served on premises intended to be consumed on premises (cafés, bars, restaurants, pubs) 
  • Non-alcoholic drinks intended to be consumed on the premises (cafés, bars, restaurants, pubs)   
  • Takeaway (this only applies to hot takeaway food and hot non-alcoholic drinks

This means that, unfortunately, if you fancy a glass of wine with your meal, or you want an ice cream to eat along the seafront, these will still be taxed at 20%.

In terms of food and non-alcoholic drinks being served on premises, these must be deemed to be in the course of catering. In plain English this means, the food and drink must have some preparatory work done to it before it reaches your table – you can’t just serve food straight out of a packet!

For example, if you went to the pub and bought a meal of pie and chips, this would be taxed at the reduced VAT rate of 5% - this is considered to be ‘in the course of catering’, because a significant amount of work has been put into this before reaching your table. However, if you bought a Magnum ice lolly for dessert, this would be taxed at 20%. This is because no preparatory work has been done to it!

Additionally, simply doing catering work under a contract will not qualify for the reduced VAT rate.

Cold takeaway food is still subject to VAT at 20%. This might cause an ethical issue for some businesses. For example, if you run an ice cream parlour, any customers who eat in will pay the reduced VAT rate of 5% but any takeaway customers will pay VAT at 20%.

Given the general public’s awareness of these new VAT rates, if you keep prices the same for takeaway and dine-in customers, this might annoy customers and could end up driving them away

Tourism

Hotels and holiday accommodation

The temporary reduced VAT rate of 5% will also apply to the following accommodation:

  • Hotels, guest houses, B&Bs, hostels and other similar establishments
  • Caravans, chalets, furnished holiday lets etc

This will also apply to pitch fees for touring caravan or tents and any facilities that come with the pitch fee.

However, the temporary reduced VAT rate does not apply to the following:

  • Ground rent
  • Service charges relating to caravan or tents
  • Purchase of caravans, chalets or tents

Entry to attractions

The admission fees to some attractions are already exempt from VAT under the current ‘Cultural Exemption’ scheme, and therefore the reduced VAT rate will not apply to these. Exempt VAT rate takes precedence over all other rates. 

However, the reduction will apply to admission charges regarding attractions which are not currently exempt. These include:

  • Theatres
  • Circuses
  • Fairs
  • Amusement/theme parks
  • Concerts
  • Museums
  • Zoos
  • Cinemas
  • Exhibitions
  • Other cultural event or facilities

However, the reduction does not apply to admission to sporting events.

The reduced VAT rate also does not apply to any goods or services supplied at the attraction site. However, it does apply to goods and services which are part of the admission fee or integral to the attraction.

For example, if you went to the cinema to see a 3D film and you bought 3D glasses, these would be taxed at the reduced VAT rate as you need 3D glasses to watch a 3D film. 

However, if you went to the zoo and bought an ice cream this would be taxed at 20% VAT, as an ice cream is not integral to the attraction – you do not need an ice cream to look at penguins!

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at richard@tfaaccountants.co.uk.

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