What is the reduced rate of VAT?
Last year, the Government introduced a temporary reduced rate of VAT to supplies of catering, holiday accommodation and admission to attractions (see our blog post on VAT reduction for hospitality). The reduced rate of 5% therefore applies the tourism and hospitality sector with effect from 15th July 2020.
What are the changes to the temporary VAT rate for tourism and hospitality?
However, this reduced rate will be coming to an end on 30th September 2021. For supplies after this date, the applicable VAT rate will increase to 12.5% and this will remain in place until 31 March 2022. At this point, the applicable VAT rate will revert back to the standard rate of VAT which is currently set at 20%.
What does this mean for your business?
Businesses in all the relevant sectors need to prepare for the increase in the VAT rate now. But if you are supplying holiday accommodation, it’s important to be aware of how to treat deposits and pre-payments that may be received from now until the end of the month, but for bookings that will not take place until 1st October 2021 or onwards.
From a planning perspective, a small VAT saving can be passed onto a customer where a booking with either a full payment or a deposit is taken between now and 30th September (inclusive). Essentially, you only need to account for VAT at 5% on this supply, even though the stay in the accommodation does not take place until after 1 st October 2021.
Take a look at our examples below to see how this should work in practice:
Example 1 – Booking with a deposit
Booking for holiday accommodation made 8th September 2021 for a stay on 8th October 2021.
Room price £600.00 (incl. VAT)
Deposit paid with booking of £300 – VAT rate 5% = VAT due to be accounted for in September = £14.28
Balance due on checkout £300 – VAT rate 12.5% = VAT due to be accounted for in October = £33.33
Total VAT payable is £47.61
Example 2 – Booking with full payment
Booking made 8th September 2021, for a stay on 8th October 2021.
Room Price £600 (incl. VAT)
Full payment of £600 made at time of booking – VAT rate 5% = VAT due £66.66
If the full amount had been paid in September, then there would have been a saving of £19.05.
Please contact Jessica Mason if you would like to learn more about the changes to VAT rate for tourism and hospitality. We can discuss the savings that can be achieved and the application of the reduced rate in more detail.
Telephone: 01926 422292 or 02476 306029
We look forward to hearing from you.