Extension to the temporary reduced VAT for the Hospitality Sector

Background

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. The reduced rate originally was in place between 15 July 2020 and 12 January 2021 and was extended to 31 March 2021.

In the Budget 2021, the Chancellor announced that the 5% reduced rate will 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 therefore return on 1 April 2022.

This is a welcome announcement and will provide a VAT saving for the next 12 months.

The new rate

If you calculate the amount of VAT due to HMRC from cash received,  from 1 October 2021, there will be a new VAT fraction. To calculate 12.5% VAT when using cash receipts, you should use 1/9. For example, if a customer books a holiday on 1 November 2021 and pays £126, the output tax due to HMRC is £126 x 1/9 = £14.

DateVAT RateVAT Fraction
15 July 2020 to 30 September 20215%1//21
1 October 2021 to 31 March 202212.5%1/9
1 April 2022 onwards20%1/6

Flat Rate Scheme

Those of you who use the flat rate scheme, the current temporary rate will also change on 1 October 2021. The changes to the flat rate scheme percentages for affected sectors are:

IndustryBefore 15 July 202015 July 2020 to 30 September 20211 October 2021 to 31 March 2022
Catering services, including restaurants and takeaways12.5%4.5%8.5%
Hotel or accommodation  1.5%0%5.5%
Pubs  6.5%1%4%

Deposits

If deposits are received in advance of a supply, output tax will be calculated on the VAT rate in place at the time the deposit is received.

For example, on 1 June 2021 a customer books a hotel room for 1 April 2022 and pays a deposit of £100 at the time of booking. The output tax due to HMRC on the VAT return for this period is £4.76 (£100 x 1/21).

On 1 October 2021, the customer pays a further deposit of £100. The output tax due to HMRC on the VAT return for this period is £11.10 (£100 x 1/9).

Contact

If you would like further information about this topic, please contact Jonathan Main, Indirect Tax Partner on 01772 821 021 or email jonathan.main@mooreandsmalley.co.uk