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September 28th 2021

How the hospitality industry can still benefit from the temporary VAT cut

Hospitality industry 5% VAT rate to end 30th September 2021

Due to the pandemic, on 8 July 2020, the government announced a temporary 5% reduced rate of VAT for certain supplies relating to hospitality, hotel and holiday accommodation and admission to certain attractions.

This reduced rate was initially introduced for a temporary period between 15 July 2020 and 12 January 2021 and was subsequently extended to 31 March 2021.

In the Budget 2021, the Chancellor announced that the 5% reduced rate would be extended again until 30 September 2021 and further that from 1 October 2021 until 31 March 2022, the temporary reduced rate of 5% VAT will change to the new reduced rate of VAT of 12.5%.

The normal standard rate of 20% will now return on 1 April 2022.

Advance bookings could create savings for businesses

There is no anti-forestalling legislation in place (rules which stop businesses paying or being invoiced for services before a VAT rate change, that are supplied after the VAT rate change), so where the invoice is raised or payment is made by 30 September 2021 for a qualifying supply, the 5% VAT rate applies. This means that significant VAT savings could be achieved where invoicing/payment is made in advance. Similarly, where an invoice is raised or payment is made between 1 October 2021 and 31 March 2022 for a qualifying supply, the 12.5% rate applies. It doesn’t matter when the event takes place – output tax is calculated at the VAT rate in place at the time the invoice/payment is received regardless of when the supply takes place.

Businesses should consider placing bookings and being invoiced for events or hospitality now to get the benefit of the 5% or 12.5% rate.

Accounting considerations for the sector

If your business is within the hospitality sector, the temporary rates have no doubt been a welcome measure – but they have undoubtedly created accounting challenges though and there’s still a lot to think about.

Businesses should be considering now whether their systems can cope with a brand-new rate of 12.5% - there’s never been a 12.5% rate of VAT before! Also, can your system cope with a VAT change in the middle of a VAT quarter? Or deposits raised at a different VAT rate to the main supply?

If these questions are causing challenges for your business get in touch with us today.

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