Why the cut to VAT might not be straightforward for finance teams in hospitality businesses

14th Aug 2020
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Over the past few months as life across the UK ground to a halt, the Government faced increasing pressures to help rebuild the economy. And, given that the UK hospitality sector accounted for nearly a quarter of the GDP losses in April alone, it’s clear the important role the sector will play in those plans for economic recovery.

In line with this, the Government announced a VAT cut from 20 per cent to five per cent for the sector. It also launched a nationwide Eat Out to Help Out campaign to encourage Brits to dine out with 50 per cent off food at participating restaurants on selected days. Though it’s clear to see how this could help to give the sector a much-needed boost, for finance teams working for pubs, restaurants, cafés and leisure attractions, it certainly throws up a whole new set of challenges.

Increased admin

With some businesses now having to navigate up to three different VAT rates at once, finance teams could soon find themselves overwhelmed by the increased levels of admin.

Under the new temporary measures, the supply of dine-in food products, soft drinks and hot takeaway food will fall under the new five per cent VAT bracket, and can be applied by restaurants, pubs and cafes. However, alcoholic drinks will continue to be subject to a VAT rate of 20 per cent, and cold takeaway food will continue to be VAT-free. In addition, accommodation and entry to attractions will also now face a temporary VAT cut to five per cent, adding an extra layer of complexity to VAT calculations for hospitality finance teams.

What happens, for example, if you’re a theme park with accommodation and an onsite bar that sells alcoholic drinks, hot and cold takeaway food, dine-in food and soft drinks? And, with alcoholic drinks being subject to 20 per cent tax and non-alcoholic drinks remaining VAT-free, what happens when it comes to calculating the correct VAT for spirit and mixer drinks?

Those businesses taking part in the Government’s Eat Out to Help Out scheme face further confusion. With many POS systems unable to process three different VAT rates, this may cause issues if plans aren't put in place to help customer facing staff accurately provide customers with the right costs on items.

For example, with the 50 per cent offer only available on food and non-alcoholic drinks, it can prove difficult to separate food bills from any potential alcoholic drinks purchased on the same bill. As a result, bar and restaurant owners will often be left with no choice but to separate the items manually themselves, taking them away from focusing on more pressing tasks that help to rebuild their business.

Increased pressures to get digital

As restaurants, pubs and leisure attractions start to come to terms with the latest measures, we’re likely to see VAT software applications really come into their own along with the need for robust tools that streamline processes and drive efficiencies. After all, with the whole sector tasked with helping to pick up the pieces of the now fragile economy, none can afford to lose hours spent to VAT admin tasks.

Making Tax Digital compatible tools such as Access Digital Tax allow finance teams to digitally submit VAT returns. Connecting seamlessly to any accounting system, they allow businesses to ensure they’re VAT compliant quickly and easily.

Designed to bring together all accounting and financial operations into one place, Access Digital Tax helps make VAT returns as accurate as possible. With the ability for finance teams to enter tax details throughout the year, it could lead to fewer errors and miscalculations.

By producing and storing all VAT digitally, it means finance teams can view, review, edit and check all VAT data quickly and easily, making implementation of the new VAT rules a much more straightforward task.

Though a move to online finance is not mandatory for all businesses yet, unless they are a VAT-registered business that exceeds the £85,000 threshold, a move towards digital practices for all hospitality finance teams could be the key to driving future business growth and profitability across the sector.

Cash flow issues

With thousands of hospitality businesses forced to close their doors in the wake of COVID-19, it stands to reason that cash flow will be front and foremost in the minds of all business owners. After all, without a steady stream of cash, the sector has no chance of recovery.

However, under the Government’s new temporary VAT measures, it could mean that stock purchased before 15 July when VAT was 20 per cent, will now have to be sold at the new reduced VAT rate. Although this is great news for consumers, it could end up leaving many hospitality business owners out of pocket.

For those participating in the Eat Out to Help Out scheme, there are further worries that the campaign will boost bookings on Mondays, Tuesdays and Wednesdays but weekend trade could take a hit with many punters reluctant to go out and pay full price when they could pay less earlier in the week.

The past few months have been extremely difficult for so many working in hospitality and though it seems steps are being made to help, it’s clear the sector isn’t out of the woods just yet.

Only time will tell whether the VAT cuts and nationwide campaign to dine out will prove fruitful. However, with more and more businesses announcing closures and job cuts every day, the need for strategies that drive efficiencies, boost productivity and rebuild lost revenue has never been more important.

To find out more, download our free guide, Building Momentum: How to help fuel business recovery.

Building Momentum: How to help fuel business recovery