VAT cut extended for hospitality sector and interest free deferred VAT repayments

The VAT rate for the hospitality sector will remain at 5% until 31 March 2021. From that date, traders will be able to apply for an 11-month interest-free payment window for their deferred VAT.

The reduced 5% VAT rate for the hospitality industry was due to apply for the period between 15 July 2020 and 12 January 2021. This period has now been extended to 31 March 2021.

This is good news for the hospitality industry, especially as the winter months will have the dual challenge of both Covid-19 restrictions and higher overheads for many businesses (electricity and gas etc) coupled with lower sales and had been broadly welcomed.

The 5% rate applies to the following main supplies:

Food and drink – on and off premises, but excluding alcoholic drinks .

Holiday accommodation – hotels, caravan sites, guest houses, camp sites.

Admission fees to tourist attractions – such as zoos, theatres, fairs, amusement parks etc.

HMRC has clarified the following reduced rate points:

‘Spirit and mixer’ and ‘pie and pint’ offers

It is often problematic to correctly treat mixed supplies for VAT – in submissions, it was suggested that a ‘gin and tonic’ could be classed as a single supply of a non-alcoholic drink charged at 5% VAT because the tonic has more fluid than a gin. HMRC confirmed, however, that it is a single supply of an alcoholic drink and subject to 20% VAT. The drinker is interested in the gin and the tonic is an incidental extra.

In contrast, a  ‘pie and pint’ offer ordered inside a café or pub is a mixed supply with output tax apportionment needed, because customers expect both food and drink – ie 20% VAT is payable on the pint (if alcoholic) and 5% VAT on the pie.

Admission vs participation

The word ‘admission’ means the right to enter a site, event or location. There has been some confusion where a customer pays a fee for an individual ride and whether this is classed as admission.

HMRC’s reply to this question is as follows: “Where there are charges for individual rides, in order to be considered an attraction that is eligible for the reduced rate, the ride must be similar to that of an amusement park or fairground in its own right.” This confirms that participation fees are excluded, unless the entrance and pricing structure specifically qualifies as ‘admission.’

Interest free loan on deferred VAT repayments

There was concern that many construction industry businesses would be faced with a double VAT hit next spring. This is because the adverse cashflow impact of the new reverse charge system due to take effect on 1 March 2021 would be swiftly followed by the repayment date of 31 March 2021 for VAT deferred on payments due between 20 March 2020 and 30 June 2020.

This cliff edge payment date has been made optional by the Chancellor, because the business can apply for the VAT deferred to be repaid over the following eleven months, effectively an interest free loan.

The reason that builders will have an adverse cashflow with the new reverse charge system is that instead of collecting VAT and retaining it in their bank account for up to three months before their next VAT return is submitted, VAT will no longer be charged on many business to business supplies because the customer will account for VAT instead.





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