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VAT 5% rate: The biggest problems clarified

Neil Warren considers the three biggest problems encountered so far with the new rules on the temporary 5% VAT rate for hospitality, tourist attractions and accommodation.

17th Jul 2020
Independent VAT Consultant
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The legislation (SI 2020/728) to impose the new 5% VAT rate is now in place, with new Groups 14 to 16 added to Sch 7A of the VATA 1994 – ie the reduce rated schedule.

One surprising point is the specific exclusion of admission to ‘sporting events’ was not mentioned in the legislation, despite being a very clear omission in HMRC’s guidance.  However, HMRC is obviously satisfied that the sporting exclusion is automatic within the wording of the law.

Previous articles

For the background and other relevant information about the temporary VAT reduction, see my previous two articles:

Three problem areas

My telephone has been busier than a betting shop on Grand National day since the rate change was announced and I have read many comments on AccountingWEB. Here are the three areas of difficulty that seem to regularly crop up:

  • Deposits received and invoices raised by hotels before the rate change took effect but where the stay takes place after the reduction;
  • Clarifying the definition of ‘admission’ for tourist attractions;
  • What attractions might qualify for 5% VAT on admission with the phrase ‘similar cultural events and facilities’?

1 - Advance invoices or payments

Example

Happy Hotel issued an invoice to Steve in January 2020 for a week’s booking in August 2020. The invoice was for half of the booking fee: £500 plus £100 VAT (at 20%), which Steve paid in the same month. He will pay the balance in August.

As explained in my earlier article, Happy Hotel has the option of wholly basing the VAT charge according to the ‘basic tax point’ (dates of the stay) rather than the ‘actual tax point’ (invoice/payment dates). With the basic tax point option, the total charge of £1,000 plus £50 VAT (at 5%) will be dealt with as follows:

  • The hotel will issue a balancing invoice to Steve for £500 + £25 VAT in August;
  • It will also give him a credit note for £75 to reduce the VAT charged in January from 20% to 5%. Credit notes must be raised within the 45-day period after the VAT rate reduction ie before 28 August (VAT Notice 700, para 30.7.5); 
  • Steve has already paid £600, so will pay £450 to settle his account in August – ie the invoice for £525 less the credit note for £75.
  • If Happy Hotel submits VAT returns each calendar quarter, it will have included output tax of £100 on its March return but will include a negative amount of £50 in Box 1 of its September return ie the invoiced VAT of £25 less the credit note for £75.

VAT inclusive advance payments

I had another question about a small B&B guest house based in a seaside resort. It is VAT registered but never issues invoices to customers; it receives advance non-refundable deposits of £50 for every booking. The guest house has accounted for 1/6 VAT on the deposits, based on VAT of 20%.

The same principle applies here: it can adjust its output tax so that 5% VAT is declared on the entire supply if the booking takes place within the window of the VAT rate reduction.

2 - What is a ‘right of admission’?

The 5% rate only applies to admission to tourist attractions. The exact wording in the legislation is ‘right of admission’. In other words, the rate can only apply when you enter an attraction or facility and does not extend to what you buy once you are inside.

To give an example, I was asked about the fees for a paintballing venue. Unfortunately, the 5% rate is a non-starter because the payments made by customers are for ‘participation fees’ – eg an hour's paintballing with equipment supplied at various levels, rather than for ‘admission’ into the premises. It is important to be clear that an admission fee is basically the right to enter the site of an event, museum, fair, exhibition, gallery etc.

3 – What attractions are classed as ‘similar cultural events and facilities’?

The list of attractions that qualify for the 5% rate on admission fees is very specific.

However, there are five words at the end which are likely to cause many headaches: “similar cultural events and facilities.” Many VAT enthusiasts will know that the words “village hall and similar” have caused controversy in the construction industry for decades: what exactly is meant by “similar”?

What about bingo?

We all have very different views about what is ‘cultural’. For example, an accountant asked if admission fees to a bingo hall would qualify as a cultural event (entry fees are VATable for bingo but participation fees are exempt as gaming).

Many subscribers might laugh and comment that bingo is not “culture”. But others might disagree and observe that bingo is very popular with many tourists who visit the UK.

It is very difficult to determine what is a “cultural facility”, which is why I emphasised the key sentence in HMRC’s guidance in my last article: “It is the responsibility of each taxpayer to demonstrate that its supplies are eligible for the temporary reduced rate.”

Incidentally, I don’t think bingo qualifies.

HMRC view

I asked HMRC’s press office if customers could call the VAT helpline service and ask direct questions such as: “Would bingo qualify for the 5% rate?”

The spokesperson said: “In the first instance, businesses should consult VAT on admission charges to attractions guidance to determine whether or not their supplies are covered by the new temporary reduced rate.

“Once the guidance has been consulted, if customers are still unsure of the liability of the supplies they make they should contact the VAT enquires helpline on 0300 200 3700 who will be able to provide further support.”

Flat rate scheme

In my next article, I will consider issues with the VAT reduction and the flat scheme. Should a business opt to leave or remain in the scheme, or possibly join for the six-month period when the 5% rate is relevant and then leave again?

See Neil Warren answer more questions on the VAT 5% rate on last week’s Any Answers Live, now streaming on-demand here. If you enjoyed the webinar, why not register for this week’s episode here.

Replies (10)

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By agknight
18th Jul 2020 10:38

I understood there is a 45 day rule, in that the stay had to be taken within 45 days of the Vat change in order to capture the deposit Vat at 5%? So I was simply going to issue credits and reinvoice the deposit now at 5%. Is this right can anyone answer please?

Also to clarify, depending on how the Vat term and condition is worded, I think it would be legit even where Happy Holidays have issued an invoice, to reissue it at 5% Vat, for the existing full amount. In other words Happy Holidays capturing the gain, just like example 2.

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Replying to agknight:
By Rebecca Cave
19th Jul 2020 10:10

That's very valid point. The article has been amended to clarify the 45 day rule for issuing a credit note.

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Replying to Rebecca Cave:
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By EllaB
20th Jul 2020 09:51

Looking at the article it says the credit note must be issued within 45 days - rather than the stay must be within 45 days - does anyone know which is correct? Also looking at the VAT inclusive example would it be the case that the B&B gets the benefit of the reduction rather than the guest?

Many thanks for any clarification.

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Quack
By Constantly Confused
20th Jul 2020 08:20

Great article as always, about the only thing I enjoy reading on AW these days are Neil Warren articles.

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By James Bolger
20th Jul 2020 08:52

Does anybody have a view on whether a crazy golf course might qualify for the 5% VAT rate?

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By David160
20th Jul 2020 09:43

If a client gets the rate wrong, and applies 20% instead of 5%, would the unjust enrichment rules apply. If the client intended to keep prices the same, not reducing them by the 15% VAT reduction, but gets the rate wrong, would the unjust enrichment rules apply then?

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By Mrbailey
20th Jul 2020 13:47

Beautiful reading making fiscal neurons fiscally effervesce and erupt like a volcano.

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By JOHNB10
21st Jul 2020 15:58

Client Static Caravan park invoiced in January for year at 20% vat for 12 months and has received his fees. Can he now issued a credit note for the 15% vat from 15 July to 31 December? Clients are asking for VAT back.
If not can he issue invoices for next year on 01 January at 5% for the whole of next year with request to be paid within first two weeks for the reduced VAT charge?

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By webbly
24th Jul 2020 09:35

I have a client who receives deposit income a long time in advance of actually supplying hot food goods. My client is wondering what VAT rate to apply on deposits that are received up to 12 January 2021, for actual supplies after that period? Anyone care to share some thoughts

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By Chris Pittock
29th Jul 2020 15:08

I certainly don't want to disagree with Neil, but (a) I was brought up on "the Tax point date is the earliest of goods delivered/funds received or date money received " in which case the Tax point date in example 1 is the date the deposit was received so should be at 20%, and (b) surely it depends on whether the price of the stay was £1,000 plus VAT or £1,200 including VAT, and finally (c) is there not a difference for VAT treatment for deposits depending on whether they are refundable or not?

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