Reduction in VAT rate to 5% – special considerations if you use the flat rate VAT scheme

In a measure to encourage people to support the beleaguered leisure, tourism and hospitality sector, the Chancellor Rishi Sunak has announced a temporary VAT rate of 5% which will apply to food and non-alcoholic drinks served in restaurants, pubs, bars, cafés and similar venues and to hot take-away food and hot take away drinks. The measure also applies to supplies of accommodation and admission to attractions across the UK. The reduced rate came into effect on Wednesday 15 July and will continue until 30 September 2021.

HMRC guidance has been issued and we also have just received the underpinning VAT legislation.

The VAT flat rate scheme (FRS) is a special VAT scheme aimed specifically at small businesses and is intended to reduce the administration associated with preparing and submitting VAT returns.  It allows a registered trader to calculate the amount of VAT they need to pay HMRC by reference to their gross turnover only, applying a sector specific percentage to this figure.

What happens if I use the VAT flat rate scheme?

The percentages that apply to businesses that operate the flat rate scheme have been amended to take account of the 5% rate. The relevant rates are as follows:

  1. “Catering services including restaurants and takeaways” has been reduced from 12.5% to 4.5%
  2. “Hotel or accommodation” has been reduced from 10.5% to 0%
  3. “Pubs” has been reduced from 6.5% to 1%.

We can help you decide whether it is better to remain in the FRS or leave to take advantage of normal accounting. You can decide to come out of the FRS but you cannot re-join for 12 months.

Please do get in touch if you require further information or details on how to amend your accounting software.  

Contact us

If you have any questions in regards to the above content, please contact Colin Johnson at 01539 729727 or email