VAT Cut For The Tourism And Hospitality Sectors
On 8th July, Chancellor Rishi Sunak announced in a statement to the House of Commons plans to reduce VAT rates for hospitality and tourism businesses.
The VAT reduction announcement comes as many businesses have been severely affected by the coronavirus pandemic, particularly through forced closures and post-lockdown social distancing rules.
In a bid to boost the economy and encourage people to spend more, VAT rates will be cut from 20% to 5% on certain items.
When does VAT reduction start? And what do the VAT cuts include?
The new VAT rules are in place from 15th July 2020 and will be in place for six months, until 12th January 2021.
The VAT cut sits alongside the UK Government’s ‘eat out to help out’ voucher scheme, where diners can get a 50% discount on dining at certain restaurants.
The reduced VAT rates apply to business across the hospitality, holiday accommodation and tourism sectors.
In hospitality, VAT will be reduced on food and drink sold in cafes, restaurants and pubs. The official government guidance on the VAT cut states the rules apply to on-site consumption of all food and drink, and hot takeaway food or drink. Alcoholic beverages are excluded from the VAT reduction and will continue to be subject to the standard 20% VAT rate. The new 5% VAT rate also applies to professional catering for parties, wedding receptions and conferences.
Also included are businesses in the tourism sector, who can cut VAT on admission charges to their tourist attractions. But what exactly can be classed as a tourist attraction? According to HMRC sporting events do not count, but theatre shows, amusement parks, circuses, zoos, museums, art exhibitions and cinemas do.
And finally, there is reduced VAT on holiday accommodation such as hotels, caravan parks and campsites, which applies even if the booking was made before 15th July.
Should my business pass on the VAT savings to customers?
As a business, you have the choice to either pass the VAT reduction on to your customers and reduce prices, or to keep prices the same and take more of a direct benefit from the reduction. Since the announcement in early July, there is growing public perception that eating out will be ‘discounted’ which businesses must take into account when deciding whether to pass on some or all of the savings.
Wetherspoon’s are already running a ‘Lower VAT = Lower Prices’ campaign, and plan to invest the money saved by the VAT reductions into dropping prices across their range of ales, hot drinks, soft drinks and hot food.
If you want to look at your potential options, we’d recommend using our scenario planning tool to work out what’s going to work out best for your business and your customers. By exploring multiple scenarios, you can plan the optimal way for your business to take advantage of the VAT cut.
How to change your billing processes to reflect the VAT cut
Once you have used Float to decide the optimal way for your business to take advantage of the VAT cut, you need to ensure you’ve updated your accounting system with the new 5% VAT rate on both income and expenditure. It may already be set up as standard (like in Xero), or you can set it up manually.
When the 5% VAT rate is set up, you may wish to change the following areas to make sure it’s applied consistently in your accounting system:
- Chart of accounts
- Customer and supplier contacts
- Products and services
- Bank rules
- Repeating invoice templates
It’s also important to set a reminder for 12th January 2021, to change the VAT rate back again.
How to calculate the VAT reduction as part of my cash flow forecast
For businesses eligible for the reduction, calculating VAT may prove tricky with several grey areas. For example, working out VAT on mixed supplies can be challenging at the best of times, but the latest VAT reduction could add a new layer of complexity.
To reflect a VAT reduction in your cash flow forecast, you’ll need to recalculate your budgets in Float to still be inclusive of VAT, but at the lower percentage. If you’re new to Float, put in your budgets for both income, and where it applies, expenditure, as gross figures including VAT at the 5% rate until the 12th of January. After that date, set the budgets including 20% VAT. Then go into your VAT line and update your budgets for paying your VAT bills to reflect the reduced rate.
Times may be unpredictable, but a cash flow forecast can help you prepare your business for any scenarios that might unfold over the next few months. Try out Float now by signing up for a free 14-day trial.