Reduced rate VAT for the hospitality and tourism sector

Last week the government announced that it would introduce a temporary 5% reduced rate of VAT for certain supplies in the hospitality and tourism sectors.

The standard 20% rate is being reduced to 5% from 15 July 2020 until 12 January 2021.

These changes are being brought in as an urgent response to the coronavirus (COVID-19) pandemic to support businesses severely affected by forced closures and social distancing measures.

Below we’ve summarised some of the key industries affected and how to apply the reduced rate. More detailed information can be on the government website.

What supplies will be affected?

The following supplies will benefit from the temporary 5% reduced rate of VAT:

• food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs
• hot takeaway food and hot takeaway non-alcoholic beverages
• sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities
• admissions to the following attractions that are not already eligible for the cultural VAT exemption such as:
  • • theatres
    • circuses
    • fairs
    • amusement parks
    • concerts
    • museums
    • zoos
    • cinemas
    • exhibitions
    • similar cultural events and facilities

Where admission to these attractions is covered by the existing cultural exemption, the exemption will take precedence.

Applying the 5% reduced rate

The reduced rate means that you have two options:

1.  Lower your prices to only add on the VAT charge at 5%. This passes the reduced VAT discount to your customers, and may help to encourage business if prices are lower.

2.  Maintain existing prices and hold onto the 15% difference for yourself. Whilst your prices may be higher than others (if they choose option 1), this may help out with your cash flows.

If you use an EPOS system or other sales / till software, you should contact your software provider to find out how to make any necessary changes in the settings to apply the new VAT rates.

If you’re using Xero to do your invoicing, the reduced 5% VAT rate should already be available in your account. All you need to do is select the appropriate VAT rate for affected supplies as instructed by HMRC.

If the reduced rates don’t appear in your Xero account, you can easily create them by adding a new tax rate.

Catering and takeaways

As a number of our clients are in the catering and food industry, we thought it would be worthwhile highlighting how the reduced rate generally applies in this sector.

The 5% reduced rate applies to:

• hot and cold food for consumption on the premises on which they are supplied
• hot and cold non-alcoholic beverages for consumption on the premises on which they are supplied
• hot takeaway food for consumption off the premises on which they are supplied
• hot takeaway non-alcoholic beverages for consumption off the premises on which they are supplied

External Catering

Supplies of food and drink that are supplied as part of a supply of catering services for consumption off-premises remain standard rated. 

In short, this means that if you provide catering at various events, such as wedding receptions, parties, conferences etc, your services should remain standard rated.

More information on this can be found in VAT Notice 709/1 Catering, takeaway food.

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