VAT Rate cut – Tourism & Hospitality Sectors
The management of VAT took another turn on Wednesday as the Chancellor announced a VAT rate cut specifically targeted at the hard pressed Tourism and Hospitality sectors.
Even before the impact of the Coronavirus this was a sector that had been lobbying for a VAT rate reduction to stimulate growth in the UK staycation market.
Prior to the announcement yesterday of a targeted cut to the reduced VAT rate of 5% from the existing 20% standard VAT rate there had been talk of a more widespread rate cut back to 17.5%. This was a step not taken by the Chancellor in his Summer Statement so perhaps remains as an economic lever to use when we come to the Autumn Budget?
Normally we would see detailed HMRC guidance notes issued on the same day as such a major rate cut but it appears there is a delay on the specifics from HMRC so we’ll start with what we do know from the Chancellor’s policy paper issued on Wednesday.
Sales of meals, eaten in or hot takeaway; accommodation charges and admission to attractions will benefit from a rate cut from Wednesday 15 July for six months to the 12 January 2021.
We understand that in terms of accommodation this will benefit a range of offerings from hotels to caravan parks. Attractions including cinemas are covered but we need to see the details to understand to what extent performing arts are included.
How will it affect pricing?
Clearly there could be two potential outcomes. The qualifying business could choose to pass on the VAT reduction to consumers as a means of encouraging customers to buy. A meal costing £15 including VAT at the current rate of 20% will cost only £13.12 when the VAT rate is only 5% and the full benefit of the cut is passed on to the customer.
However, it may be for any number of reasons that the business decides to leave its prices at current rates. In this case the business retains the benefit of the reduction in the VAT amount it has to pass over to the revenue.
Businesses already face reductions in the numbers of customers they can serve and they face reduced trading levels because of the social distancing requirements and making furlough contributions, so it may be this extra £1.88 on a £15 meal as in the example above, will be used to help support the business. Perhaps this was an option considered by the chancellor as other funding measures are reduced?
Irrespective of the approach taken on pricing levels a range of practical implications arise from a VAT rate change, from printing issues and website updates for menus and accommodation rates to more technical VAT implications for how to treat deposits and payments under the tax point rules and amending electronic tills through to accounting systems to avoid errors in the VAT calculations of the tax due.
There is less than a week for those affected businesses to prepare and as mentioned above we wait on the finer details from HMRC.
There is much that we do know, however, and so actions can start now. It’s not just tourism and hospitality areas of course that need to consider this but also sectors with catering provision, from universities and colleges to theatres with restaurant provision as well.
It should also be recognised that the discount scheme under the Eat Out to Help Out plan will also create a need to consider the VAT aspects. The restaurant may be offering a discount on the meal to the customer but that discount value of up to £10 will be refunded by the government. The VAT impact might be that the refund could be regarded as third party consideration for the meal - definitely an aspect to look for clarity on from HMRC therefore.
Other countries across the EU have undertaken similar actions over reducing rates for these sectors so there will be a range of evidence available as to its potential benefits. Whilst the cost to the exchequer is estimated at £4bn if you consider the cost of the deferral of VAT payments to June at £38bn this targeted and sector specific action may prove an effective economic stimulus as well as a business support mechanism.
What is clear is that it’s another moment when VAT gets complicated and Centurion are here to help you and your organisation.
We’ll be contacting all our affected clients to talk through the implications specifically for them - tailored advice more effective we thought than a generic update. If you’d like to discuss your concerns then don’t hesitate to email us at firstname.lastname@example.org or call on 01633 415390
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