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Cut in VAT: FAQs

The hospitality industry has been asking for a cut in VAT for over a decade.  ASSC has supported this campaign and we welcome the temporary reduction in VAT to 5% for hospitality and accommodation.

The UK Chancellor, Rishi Sunak announced a raft of support measures to revive the UK economy last week, and importantly, a VAT cut from 20% to 5%, something the hospitality industry has campaigned on for many years.

On 16th July, the VAT flat rate scheme reduced to zero for accommodation.

Please see new guidance from HMRC in which accommodation has been reduced to zero %. This is the result that we were looking for, and will be welcomed by all on the flat rate scheme.

Does it cover self-catering accommodation? Yes, it does.

Marc Crothall, Chief Executive of the Scottish Tourism Alliance said:

“The series of support measures announced by The Chancellor this afternoon are hugely welcomed by Scotland’s tourism industry and go beyond what we had anticipated in terms of the lowering of VAT to 5%.  The STA, along with our counterparts at UK Hospitality have campaigned heavily for years for the UK government to cut VAT to 5%; this represents a huge catalyst for the tourism economy and I know this news will come as a huge relief today for thousands of pubs, restaurants, accommodation providers and visitor attractions across Scotland and their employees whose jobs have been given increased protection.

The “kick start” scheme to create more jobs for young people is a huge boost for the tourism sector, as indeed is the announcement of support for businesses taking on new apprentices with the under 25s representing such a large proportion of our workforce, however we will continue to push for support for all employed in the tourism sector.  Further tailored support for older people within the sector is still required as the stark reality of the unemployment crisis looms large.

Incentivising the public to support our hospitality industry was one of the recommendations the STA made to the Independent Advisory Group on Economic Recovery and I am pleased to see that this has been included in the raft of support measures announced today for the tourism sector.  We must remember that while August marks the start of the school holidays south of the border, Scots are already planning staycations and days out throughout July so we will be pushing for the ‘Eat Out to Help Out’ initiative to be brought forward in alignment with the reopen date of Scotland’s tourism industry on 15th July.”

Holidaymakers have been told that the Government’s VAT cut for the hospitality sector is aimed to help businesses not reduce the cost for tourists.

The reduction was aimed to help businesses which have been hit hard by the coronavirus pandemic and have been closed for months. The VAT cut is to support the businesses as well as to stimulate customer spend. This is encouraging businesses to save as the government will return the 15% to help them.

However, shortly after the announcement some tourism businesses had calls from customers asking for a 15% reduction in their bill to reflect the cut in VAT.

There is no compulsion on the business to pass on the VAT reduction to customers. Businesses can continue to set their own prices, so effectively they can choose to pass on the cut in full, in part, or not at all.

Inevitably the announcement raises various questions, particularly as it is for a specified period. Some questions answered:

Q1: What if I am not VAT registered?
A: This only applies if you are VAT Registered.

Q2: When does the lower rate of VAT apply?
A: This change will come into effect from Wednesday 15 July 2020 and run through until 12 January 2021.

Q3: Does it only apply to holidays taken with the period 15/7/2020 and 12/02/2021?
A: It will apply to the date of supply – so if VAT is declared and paid when cash is received then it could be based on cash receipts. The date of sale is generally the date of the invoice or holiday or the date cash is received, whichever is the earlier – deposits are generally considered to be the date of Supply as the intention is that they are part of the sale as opposed to a security deposit for damages which are intended to be repaid.

Q4: What does it actually apply to, is it the date that payment is actually made for VAT accounting?
A: We believe it will be the transactions reported on the VAT returns between now and January.

Q5: What is the Rate Reduction?
A: From 20% to 5%

Q6: What if I am on the Flat Rate Scheme?
A: HMRC may announce further guidance on this – but as a precaution you may need to notify HMRC that with effect from today you wish to come off the flat rate scheme if there is no guidance published soon.

Q7: If the customer has paid the deposit previous to 15 July 2020, can they pay their balance after 15 July 2020 and the lower VAT rate apply on the balance?
A: Yes, the VAT applies to when the transaction is reported on the VAT return.

Q8: Is there any way that the customer can demand that they pay the lower rate for the whole holiday if they have already paid in part or in full?
A: No, not unless prices were quoted as £x plus VAT, the price quoted on most websites is VAT inclusive price regardless of the VAT rate, it is down to the service provider to decide whether to pass on the saving, it might also be worth pointing out to guests that the VAT reduction is largely designed to enable holiday providers to stabilise their financial position and help them recoup losses they have already incurred from 4 months of closure.

Q9: Can a customer cancel their holiday, rebook after 15 July 2020 and take advantage of the lower rate of VAT?
A: In theory they could. But I suspect HMRC would adopt a view that it might be artificial. This would be even more the case if the holiday provider did not apply the cancellation terms stated where deposits are generally lost. It is not advisable to get customers to cancel and then immediately rebook or to not enforce cancellation terms.

Q10: Is it really a 15% discount?
A: No because of the way that VAT and mathematics works it’s nearer 12.5%. It’s not designed to be a discount to the customer, it is designed to be a financial support measure to the hospitality sector – by enabling them to get higher net of VAT turnover to make up for all the lost sales for 4 months.

Q11: Are there any rules that say we have to reduce our prices if we are VAT registered?
A: None whatsoever

Q12: How does the pricing work if the customer pays for the holiday post 15 July 2020, but pays the balance after 12 January 2021?
A: The reduced rate applies to the deposit and the 20% rate will apply to the balance. Holiday providers could potentially offer guests a discount for paying in full in the discounted VAT period

Going forwards…

Q1: Will the scheme be extended?
A: Too early to tell, if it is deemed to be successful and HMRC believes it has increased business levels there is a possibility. However, we should plan to operate at the lower rate only for the specified period.

Q2: Can the customer book after 15 July 2020 and pay before 12/01/2021 in full for a holiday in say 2022, and it still attract the 5% VAT Rate?
A: In theory yes, we suspect it is possible, however, we would not advise trying to manipulate things too much in your favour – we would advise common sense prevailing – if HMRC do think people are not acting sensibly they might simply change the rules.

Q3: If yes to above question and customer subsequently cancels how is the VAT Rate treated?
A: As it is a credit to the original sale it should reverse at the 5% rate.

Q4: What period should we amend any pricing on our bookings system?
A: As the VAT reduction only covers a short period, make sure that your pricing both pre and post the closing date of 12th January 2021 reflects what you want to charge allowing for the prevailing VAT Rate.

Q5: What would be best practice on pricing?
A: The customer will expect to see some consideration, perhaps putting a note on your pricing that your new prices reflect the change in VAT Rates might be helpful.

Q6: What will everyone else be doing?
A: We would expect most to try and hang onto as much the reduction as possible. The huge agents only charge 20% on the commission, so for once they won’t mess it up. Unlike the hotels sector where this may pressure prices downward, so few self-caterers charge VAT that market pricing will still prevail. If the market price for a booking is £500. It’s £500 regardless of rate of VAT.

Q7: Can I use this to boost bookings?
A: It’s a great opportunity to say that you can offer a discount for a limited period, with payment conditions and pass on some of the reduction, and still in effect raise your prices.

The Full Government Guidance on this can be found here.

Many thanks to PASC UK for providing this information.

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