VAT Rate Reduction for hospitality and entertainment sectors

(Updated 8 July 2020)

There will be a temporary VAT rate reduction for some businesses in the hospitality and entertainment sectors.

VAT is always one of the more complicated taxes to deal with and we only have limited information at this time.  We will update this page as more information is confirmed.

When does this start and how long for?

The reduced VAT rate will apply from Wednesday 15 July, and will last until Tuesday 12 January

This means that the change of rates will not fall neatly into any VAT quarterly returns.

What sorts of sales are now to be charged at 5% VAT?

Food:

• Food eaten in
• Hot takeaway food
• Non-alcoholic drinks

Accommodation:

• Hotel rooms
• B&B accommodation
• Campsite & caravan fees

Entertainment:

• Cinemas
• Theme parks & attractions
• Zoos

When will we get more details?

There is sure to be some very specific rules and exemptions to this, the lists above are general areas as announced on the 8 July 2020 and many more may be affected.

More details are due to be published this month, hopefully in the next week!

Do I need to pass this onto my customers?

It appears that the intention of the VAT reduction has two aims, firstly to encourage consumer spending in these hard-hit sectors. Secondly it is to help businesses in these sectors get back on their feet.

Rishi Sunak said that although he hoped most businesses would pass on the reduced VAT to their customers but it was a decision left with the businesses themselves. Therefore, you can keep the headline price of these items the same and increase the margin (temporarily) on those items for the business.

There will however be some pressure to reduce prices on some items as some competitors will reduce prices based on the VAT reduction.  However, there will also be some businesses in some of these sectors who are not VAT registered at all and there have no flexibility here.

How do I record this?

If you are using Xero bookkeeping then you will need to identify the sales made that fall under these categories and update the default settings so that they are now set for reduced rate VAT. Xero give some instructions on their forums here.

For users of Sage you will need to set a new default for specific products or when inputting these items not use your standard Tax Code but use the reduced rate VAT code.  This is usually “T5” but you can check this by going to: Settings / Configuration / Tax Code, this will then show you a list of all the configured tax codes. Businesses that have been using Sage for more than 9 years should pay attention to this as edits could have been made 10 years ago when we last had a VAT rate change.

Most businesses however will need to review their EPOS or front of house pricing systems to make sure that operators are selecting the correct products when charging customers and make sure that the system behind it is recording the correct VAT treatment.

These changes may need some specific review and technical assistance.