Temporary cut to VAT – what impact will it have on the Hospitality sector?

A much needed boost to the hospitality sector was announced by the Chancellor Rishi Sunak as part of his mini-budget on 8 July 2020.

What changes have been made?

A reduced VAT rate of 5% is to apply to on premises supplies of food and non-alcoholic drinks by restaurants, cafes and pubs, to some takeaway food, to sleeping accommodation provided in hotels and to entries to attractions such as amusements parks. A statutory instrument introducing the changes into the legislation was made on 13 July 2020. The reduction in the VAT rate from 20% to 5% will apply from 15 July 2020 to 12 January 2021. For small businesses that use the flat rate scheme reduced percentages will also apply in relation to those supplies.

Businesses can either pass all of the benefit to consumers by reducing prices or can retain the benefit partly or in whole themselves. From reports in the press it appears that businesses are taking a variety of approaches, with some pub businesses planning to reduce the prices of their alcoholic drinks (which do not benefit from the reduced rate) and funding this by not passing all of the reduced rate when supplying food to customers.

What does this mean for the Hotel sector?

So far as the hotel industry is concerned, the benefit of the reduced rate of VAT will apply to sleeping accommodation provided in hotels or similar establishments, holiday home accommodation and (to the extent relevant) pitch fees for caravans and tents. In relation to food sold for on premises consumption (for example in a hotel restaurant) the reduced rate will apply to hot and cold food and hot and cold non-alcoholic drinks. In addition, hot takeaway food and hot non-alcoholic drinks sold for consumption off the premises qualify for the reduced rate.

The precise rules will need to be looked at carefully by the hospitality industry to work out to what extent the standard rate, reduced rate or zero rating apply. For example, where a hotel is supplying a package of wedding services including the use of rooms for a ceremony, wedding breakfast and evening party HMRC regard this as a single standard rated supply, regardless of whether the catering is supplied by the hotel or someone else. However, if the catering is provided in-house as a separate supply it may be able to benefit from the temporary reduced rate, depending on whether single or multiple supplies of services are being made.

Does timing affect the rate cut?

HMRC have included in their guidance their view as to the correct VAT treatment if a holiday "points" club is operated under which members of a club purchase points which can be exchanged for holiday or hotel accommodation. They say that a standard rated supply is being made at the time at which the points are converted into the right to occupy UK holiday or hotel accommodation. If the points are converted between the 15 July 2020 and 12 January 2021 the operator of the club is making a temporarily reduced rated supply. This demonstrates how important it will be to consider the time a supply is made in order to apply the correct VAT treatment to it.

Disclaimer

The current global crisis is evolving rapidly and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.