VAT 5% hospitality rate: Get the details right
HMRC has now issued detailed guidance about the temporary VAT reduction for the tourist and hospitality industry that starts on 15 July. Neil Warren considers some practical issues.
Guidance about the important VAT rate cut has arrived sooner than expected, which is very welcome. It is reasonable to divide the changes into three sections:
- Food and drink for pubs, cafes, restaurants: VAT Notice 701/14: Food products and VAT Notice 709/1: Catering, takeaway food; have both been updated to reflect the reduction;
- Overnight accommodation: hotels and similar establishments, campsites, caravan parks – VAT Notice 709/3: Hotels and holiday accommodation; has been updated as well.
- Tourist attractions: a separate document is headed ‘VAT on admission charges to attractions’
Further analysis is given in Revenue and Customs Brief 10/2020 and a separate paper that covers issues such as the flat rate scheme, tour operators margin scheme (TOMS) and the VAT position for supplies that straddle the VAT rate change – eg deposits received by hotels before the rate change but where the actual stay takes place after it takes effect.
Food and drink
The rules for food and drink sales by pubs and the like appear straightforward:
- On-site consumption: All sales of food and drink will be subject to the reduced VAT rate, apart from alcoholic drinks, which are still subject to 20% VAT.
- Takeaway sales: If it is hot food or a hot drink being sold, and it is not alcoholic, it is subject to 5% VAT – otherwise 20%. Mulled wine will be excluded because it is alcoholic.
In my previous article on the VAT hospitality cut, I considered the takeaway sale of a bottle of beer, café latte, and a cheese and tomato sandwich. Let’s add a packet of crisps and fish and chips to this list and also consider the same package being sold inside the pub or restaurant.
Four of the five items sold inside the pub will be subject to 5% VAT – ie everything but the bottle of beer which is excluded (unless it is alcohol free beer of course).
The difference with the takeaway sale of the same goods is that the crisps are also standard rated (as would be the case with confectionary items such as chocolate bars and ice cream) and the sandwich qualifies for zero-rating as cold takeaway food, as has always been the case.
The difference with the crisps is because ‘hot and cold food’ qualifies for 5% VAT on-site but only ‘hot food’ for takeaway sales.
I questioned the definition of an ‘attraction’ in my last article, asking whether admission to a sporting event would come within this definition. The answer is no. HMRC has specifically listed sporting events as an exclusion.
But the list where the 5% rate applies on admission fees is bigger than might be expected: shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions, similar cultural events and facilities.
Note – admission to some facilities is already exempt from VAT under the cultural exemption, mainly relevant to public bodies and not-for-profit organisations. The exemption takes priority over the 5% rate. VATA1994, Sch 9, Group 13.
Example: An admission fee to botanical gardens would be subject to 5% VAT as a cultural facility.
The ‘prepayments’ section of my last article has also been confirmed by HMRC, with a specific reference to paras 30.7.4 to 30.9.2 of VAT Notice 700. In other words, a hotel deposit received before the rate change but where the stay takes place afterwards can be subject to 5% VAT but at the option of the business owner.
Flat rate scheme (FRS)
The guidance also confirms that the relevant flat rate percentages for categories covered by the reduced rate will be adjusted temporarily. This is a surprise – I didn’t expect this to happen.
The two most relevant categories will be ‘catering services including restaurants and takeaways’ at 12.5% and ‘hotel or accommodation’ at 10.5% - possibly ‘Pubs’ at 6.5% although most pubs have an annual turnover above the FRS threshold of £150,000 so rarely use the scheme. At the time of going to press, there is no detail about the new percentages.
The guidance about VAT on admission charges helpfully gives two examples of supplies where more than one rate of VAT applies, usually 20% and 5%.
One of the examples confirms the admission fee for a brewery tour will be subject to 5% VAT, even if the fee includes some food and drink as part of the tour – ie the food and drink is ‘incidental’ to the tour. But if eating and drinking was the main priority, it would all be subject to 20% VAT.
The key wording is as follows: “It is the responsibility of each taxpayer to demonstrate that its supplies are eligible for the temporary reduced rate.” This is an important sentence: it recognises that there will be grey areas but as long as a sensible and reasonable approach is adopted to each practical situation, HMRC will hopefully accept the calculations made by business owners to work out how much VAT is due. Mixed supplies are always a challenge.
Until this guidance was issued last night, I had many concerns about how the new rules would work. I felt more off-track than a blindfolded cyclist who had a few too many drinks. But the waters are now much clearer. Hopefully, business owners can move forward and be ready for the big VAT saving bonanza day on Wednesday.
Rebecca Benneyworth and Neil Warren join Any Answers Live this Tuesday to chew over the key measures announced by the Chancellor in his summer statement and answer your questions on the temporary VAT reduction. Register now to join this popular session.