Temporary reduction in VAT Rate for Hospitality Businesses

Background information & Guidance

Last Wednesday, 8 July, the Chancellor announced a reduction in VAT rates for hospitality businesses on food and non-alcoholic drinks, accommodation and tourist attractions, from standard rate of 20% to a reduced rate of 5%. The reduced rate applies for the period from 15 July 2020 to 12 January 2021. This note provides guidance on the government announcement made on 10 July detailing the application to each of these areas.

Catering, food & drinks VAT

This is where the greatest complications arise. Updates to deal with the application of the new VAT rate have been made and published in VAT Notices 701/14 for food and 709/1 for catering and takeaways. Essentially, the following table gives a broad analysis of the VAT treatment in different scenarios. Alcoholic drinks remain chargeable at standard rate – 20%.

Pre 15 July VAT Rate Post 14 July VAT Rate
Consumed on premises
Non-alcoholic drinks (hot & cold) 20% 5%
Food (hot & cold) including snacks 20% 5%
Takeaways
Non-alcoholic cold drinks 20% 20%
Snacks, confectionery 20% 20%
Non-alcoholic hot drinks 20% 5%
Hot food 20% 5%
Cold food (eg sandwiches)

The complication here stems largely from the relief being applied to ALL food and non-alcoholic drink on premises but to only food & non-alcoholic drink that is hot as takeaways. This could lead to it being more profitable for you to serve cold snacks & drink on premises than as takeaway if you sell at a fixed price.

Certainly, your till system will need to be able to identify each of these scenarios, being particularly complicated if takeaways are sold in addition to on-site consumption.

An additional complication is the definition of ‘on-premises’ and to what extent that includes outdoor space. Is that outside space specific and designated for use by the premises or shared with another hospitality business, in which case it qualifies, or simply general outdoor space not belonging to the business (which is not regarded as qualifying for the on-premises reduced rate)?

Accommodation VAT

VAT Notice 709/3 has been revised and published to deal with VAT reduced 5% rate applied to hotels and other holiday accommodation. HMRC has confirmed that it is up to the hotel owner to decide whether to apply the reduced rate to a deposit paid to secure accommodation that will be used after the reduced rate period is over.

Tourist Attractions VAT

A separate document has been published by HMRC setting out the application of the reduced rate to attractions. They have confirmed that sporting events are not regarded as attractions.

There is the scope for a ‘mixed supply’ for VAT here, say a brewery tour with some beer served at the end, where the beer is incidental to the tour, is confirmed as eligible for the reduced 5% rate. If the food & drink is the ‘main event’ and the tour is incidental, the whole would be chargeable at 20% standard rate.

 

VAT Flat rate scheme

For those businesses who use the flat rate scheme, new temporary rates have been published for hotel accommodation, restaurants & takeaways, pubs, but this is unlikely to have significant impact given the limit of turnover for the flat rate scheme being £150,000.

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