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In the Chancellor’s summer statement of 8 July 2020, it was announced that the VAT rate applied to certain supplies in the hospitality and leisure sector will be reduced from 20% to 5%. The measure which takes effect from 15 July 2020 and lasts until 12 January 2021 is estimated to cost the government £4 billion.
Many European countries already offered reduced rates of VAT on tourism and cultural services and several have cut them further to support these sectors which have been badly hit as a result of Covid-19. The UK reduced rate of VAT (5%) will apply to supplies of eat-in or hot takeaway food and non-alcoholic drinks from restaurants, pubs, cafes and similar premises. The reduced rate will also apply to supplies of accommodation and admissions to attractions such as cinemas, theme parks and zoos. We await further guidance on the scope of the relief which is expected to be published together with the relevant legislation within the next few days. This VAT reduction is one of several temporary measures announced as part of a fiscal stimulus and is hoped to protect over 2.4 million jobs. The Treasury said it hoped businesses would pass the VAT savings on to customers but many have been without income for months and it will be up to them to decide.
There could be a number of challenges for businesses transitioning to the new VAT rate and there is very limited time to make these changes eg, changing the price of products in accounting systems. Hospitality and Leisure businesses will need to carefully review the details of the legislation and guidance once they are released and consider the extent to which the reduction in the VAT rate is to be passed to their customers. There will be various further areas to consider including practical issues such as menus and signage which will already show a sale price including VAT. A number of system changes may need to be implemented to ensure that accounting systems which feed into pricing of products and which also form the basis of VAT return processes can be updated appropriately or that convenient and workable temporary changes can be put in place.
Please do get in touch with us if you wish to discuss the implications of the VAT rate reduction in your sector.