Hospitality Industry: Changes to the reduced rate of VAT from 1 October 2021

Maria McConnell


Hospitality Industry: Changes to the reduced rate of VAT from 1 October 2021

As most of us are now familiar with, in July 2020 the Government introduced a reduced rate of 5% VAT to supplies made in the hospitality industry as a means to alleviate some of the financial impact Covid -19 was having on the industry.

This temporary rate was originally intended to apply between 15 July 2020 and 31 March 2021.  However, in the 2021 budget the government announced an extension to the period when 5% reduced rate would apply to 30 September 2021. 

Following this, a new reduced rate of 12.5% will apply from 1 October 2021 to 31 March 2022, with the standard rate coming back into force for all hospitality supplies from 1 April 2022.

The aim behind this phased return to the standard rate is to allow struggling hospitality businesses a longer period of time to benefit from a higher profit margin on sales, as most hospitability businesses will not have reduced their prices to take account of the reduced VAT element of their supplies.

The supplies affected by the reduced rate remains the same as when the 5% rate was introduced, i.e. restaurants and other food outlets, hospitality venues including hotels and holiday accommodation and certain attractions.

For many businesses the change in rate will only require an update to the accounting software to ensure the correct rate of VAT is applied to sales from 1 October onwards; and again, from 1 April 2022.  Indeed, many businesses such as hotels or holiday accommodation providers, can benefit from accounting for VAT on deposits paid at the lower rate of VAT, for stays which take place once the rate has increased to either 12.5% or 20%.  This also applies to gift vouchers sold when the rate was 5% where these are later redeemed when the rate has increased.  There is no requirement to adjust the VAT to take account of the tax point in force when the service is eventually consumed.  

Finally, those businesses which use the Flat Rate Scheme should ensure they take note of the increase in rate which will apply to their business turnover with effect from 1 October 2021, as follows:

Hotel or accommodations

Catering, restaurants or takeaways      

Pubs

Currently 0%, to increase to 5%

Currently 4.5% to increase to 8.5%

Currently 1% to increase to 4%

 

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