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VAT hospitality rate cut: Chaos on the menu

On Wednesday the Chancellor announced a temporary 15% VAT cut for the tourism and hospitality sector from 15 July to 12 January, but Neil Warren says more detail is needed to avoid potential trouble ahead.

9th Jul 2020
Independent VAT Consultant
Columnist
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The VAT on a sandwich and a beer out will be a lot more complicated for the next six months.
iStock_Sandwich_clubfoto

When I heard the Chancellor’s announcement about the temporary VAT cut from 20% to 5% for food and drink sold by pubs and the like, I wrongly assumed that it would include all food and drinks sales to make life easy.

But I then had a circular email from HMRC Business Help containing the two key words: “excluding alcohol”. What does this mean in practical terms?

Example: Fred’s takeaway snack

Fred goes into Jim’s licensed café on 15 July for a takeaway snack that includes a cheese and tomato sandwich, a bottle of beer and a café latte. He asks Jim for a VAT receipt so that he can claim input tax as he is away from home on business. The sandwich is zero-rated as cold takeaway food; the café latte benefits from the temporary VAT cut to 5%; the beer is excluded as an alcoholic product, so still subject to 20% VAT. Jim will either need an efficient till system to deal with three VAT rates on a single order or be good at maths if he issues a hand-written VAT receipt.

What is an attraction?

In the world of the nation’s favourite tax, one word can make all the difference. So, the chancellor’s announcement about the temporary VAT cut also applying to “attractions” got me thinking the obvious: what exactly is an attraction? Does it include admission to a concert or sporting fixture?

HMRC’s guidance email commented that it will apply to “attractions like cinemas, theme parks and zoos”. Is a cricket match an attraction? Probably not. Hopefully this will be clearer when HMRC issues further guidance on the scope of this relief in the next week.

Prepayments

The VAT cut applies to accommodation supplied by hotels and similar venues, along with caravan parks and camp sites.

Some of these businesses might have taken prepayments from customers and rightly accounted for 20% VAT on the earlier deposit. If the supply takes place in the window where the temporary cut applies, there will hopefully be scope to reduce the VAT to 5% under the optional scheme where the basic tax point (date of supply) takes priority over the actual tax point (receipt of advance payment). See VAT Notice 700, section 30.

But if the customer has borne the cost of the VAT, for example if £100 + VAT has been charged for bed and breakfast, the £15 VAT saving must be paid back under the rules of unjust enrichment. VAT Notice 700/45, section 9.

Flat rate scheme (FRS)

The FRS includes income that is subject to all rates of tax, with the relevant scheme percentage applied to VAT inclusive sales. Many businesses might want to leave the scheme because of the 15% cut and adopt normal VAT accounting. But a warning: once you leave the scheme for any reason, you must stay out for at least 12 months before you can rejoin. However, you can leave part way through a month, for example on 14 July to coincide with the rate cut. VAT Notice 733, section 12.

Mixed supplies

This has always been a controversial issue in the VAT world. If I pay £100 plus VAT for a three-course meal including a bottle of wine and a seat at a football match, what is the VAT position in the period covered by the temporary VAT cut? Is the part of the payment that relates to the game subject to 5% VAT as an “attraction”? Will the meal served in the hospitality lounge qualify for 5% VAT as ‘similar premises’ to a restaurant? And will the wine be subject to 20% VAT, or is there an argument that it is incidental to the supply of the meal and therefore not a separate supply, ie also subject to 5% VAT? Probably not. Answers on a postcard please.

More detail needed

I could raise many other practical examples of potential challenges with the new rules. Space constraint prevents this. But as you can see from the issues considered, we need more clarification on many issues to ensure businesses get things right.

As we know from past history, tinkering around with VAT can open up a whole can of worms. Ask former Chancellor George Osborne – he probably still has nightmares about his famous pasty tax Budget in 2012.

Replies (7)

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By philaccountant
09th Jul 2020 17:08

Has it been confirmed that there is no adjustment to the Flat Rate Scheme for businesses that would be affected by this temporary tax cut? In the past, changes to the standard rate of VAT have meant adjustments to the FRS percentage a business would pay.

Would seem foolish for the government to potentially trigger thousands of businesses flooding out of the FRS for 12 months, only to rejoin next year, when a tweaking of the FRS rate would likely stave off a huge amount of bureaucracy.

I asked the HMRC webchat and they told me more detail would be announced next week but nothing specific to the FRS..

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By Paul Crowley
09th Jul 2020 17:21

Much appreciated.
Concise and to the point: which is really, who knows the rules until the rules are made.
This is enough to kill several existing threads on any answers.

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By wasting asset
09th Jul 2020 18:36

If I buy a gin and tonic, is that one supply at 20%, but a gin, with a separate bottle of tonic, is that two supplies, one at 20% the other at 5%?

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Replying to wasting asset:
Quack
By Constantly Confused
10th Jul 2020 08:03

wasting asset wrote:

If I buy a gin and tonic, is that one supply at 20%, but a gin, with a separate bottle of tonic, is that two supplies, one at 20% the other at 5%?

Yep, that's my understanding and seems to be supported by 701/14, specifically:

3.7.1 Alcoholic beverages

You must standard rate all your supplies of drinks containing alcohol.

It looks like if it has alcohol in it, it's an alcoholic beverage. That seems logical, as the alcohol will be a minor part by volume, but will presumably represent the vast majority of the price of the drink.

So if you want to save yourself a few pence, order your next mixer separate from your alcohol ;)

Thanks (4)
Replying to Constantly Confused:
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By memyself-eye
10th Jul 2020 09:38

Aaahhh: so if I order a 'lager top' (90% lager and 10% lemonade) I should order them separately! But then I hear you cry: 'short measure' call trading standards.

I warrant some nerd will try to do exactly that.

ps. I don't drink lager - it's the devil's wee.

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By fawltybasil2575
09th Jul 2020 23:57

The Flat Rates for businesses in the “tourism and hospitality sector” are indeed in the course of being amended (imminently)
- no doubt only on a temporary basis for the period of nearly 6 months to 12 January 2021.

Unless those temporary revised rates are badly calculated, I would surmise that approx. 90%-95% of FRS businesses will promptly decide not to withdraw from FRS on 15 July 2020.

Of the remaining (say) 5%-10%, those businesses should (albeit it is unlikely that they all will) “do the maths” to assess whether the benefit of withdrawal from FRS (in that 6 months) is greater or less than the loss which will arise from being outside FRS in the NEXT approx. 6 months, ie from 13 January 2021 to 14 July 2021 (ie in view of the rule which prevents rejoining FRS, after withdrawal, for 12 months).

Basil.

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Replying to fawltybasil2575:
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By Paul Crowley
11th Jul 2020 00:20

I was going to say, joy do not have any. Then remembered the chip shop.

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