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Get ready for 12.5% VAT

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Most supplies made by the hospitality industry will carry 12.5% VAT from 1 October 2021. Can your accounting systems cope with four different VAT rates?

8th Sep 2021
Independent VAT Consultant
Columnist
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Some businesses will have to deal with four rates of VAT in their accounting systems from 1 October 2021.

This has not happened since 1979 and will hopefully not happen again after 31 March 2022 when the temporary 12.5% rate for most sales made by the hospitality industry will end and the 20% rate will resume on 1 April 2022. We will then be back to three VAT rates: 0%, 5% and 20%.

Affected supplies

In a nutshell, the supplies made by the hospitality industry that have been subject to 5% VAT since July 2020 will become liable to 12.5% VAT for the period between 1 October 2021 and 31 March 2022. For most hospitality suppliers, it will be a case of just changing the VAT code from 5% to 12.5% on their software – job done.

As the recent Save VAT by booking in advance article highlighted, there is no anti-forestalling legislation in place for either the rate increase on 1 October 2021 or 1 April 2022.

This means that sales invoices raised or payments received by hospitality suppliers before these dates will be subject to the rate in force on the invoice or payment date, rather than when the goods or services are subsequently consumed. This is a welcome bonus.

VAT fraction

There is an easy VAT fraction of 1/9 with the 12.5% rate. So, for example, if you pay £90 including VAT for a night’s accommodation in a hotel, and the hotelier has not itemised the VAT as a separate figure, you know that your potential input tax claim is £10.

Credit notes

If you raise a sales invoice or receive an advance payment at the 5% rate of VAT before 1 October 2021, and then it is adjusted after this date, perhaps because of an order cancellation or price adjustment, the VAT rate for the credit note will be based on the rate originally charged. This is helpfully confirmed by HMRC’s guidance: VAT Notice 700, para 18.2.5

Flat rate scheme (FRS) – new percentage rates

From 1 October, the FRS rates will increase for the following three categories:

  • Catering services including restaurants and takeaways: 4.5% will increase to 8.5%
  • Hotel or accommodation: 0% will increase to 5.5%
  • Pubs: 1% will increase to 4%

There will be a further challenge for businesses that do not complete calendar quarter VAT returns; therefore, there will be two FRS rates for VAT returns ending at the end of October or November.

Example

A restaurant completing a VAT return for the three months to 31 October, which uses the FRS will account for 4.5% VAT on its August and September gross takings and 8.5% for receipts in October.

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Replies (6)

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By SXGuy
08th Sep 2021 19:19

Um.. Just to point out we did have more than 3 rates of vat to deal with since 1979.

Remember that mad year when vat was 17.5 and then 20. Pretty sure most of us during the transition had to work with both rates at the same time for a good while.

Thanks (0)
Replying to SXGuy:
Jason Croke
By Jason Croke
09th Sep 2021 14:14

We did, but back then we didn't have cloud accounting! Sometimes things designed to make life simple, can make things a bit more complicated :)

Thanks (2)
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By memyself-eye
08th Sep 2021 21:48

twelve and a half percent looks good compared to 20%

My son, who does festival catering is grateful for 5% at the moment.

Thanks (1)
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By Paul Crowley
09th Sep 2021 12:07

Always appreciated

Thanks (0)
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By Open all hours
09th Sep 2021 18:46

Just entering discussions with Booking.com over what I believe should be a 7.5% refund of overcharged VAT.

Thanks (0)
Replying to Open all hours:
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By moneymanager
10th Sep 2021 00:20

For those with low volume claims and a rigid system, is that a solution, enter the full value at 20% and then reverse 7.5% also at 20%?

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