Temporarily reduced VAT rate for the hospitality and leisure sector

The hospitality and leisure sector has benefited from the temporary reduced VAT rate (5%) since 15 July 2020 and is due to the revert back to the standard rate (20%) after 31 March 2021.

i. Extension of the reduced VAT rate? 

If there are any VAT changes in the Budget, the most likely will be the extension to the temporary reduced VAT rate. The decision to apply the reduced VAT rate to the hospitality and leisure sector was extremely well received by the sector and helped stimulate economic growth prior to the second wave of COVID-19. Whilst we simply will have to wait until any announcement on 3 March 2021 to see if there is any extension to the temporary reduced VAT rate (and for how long), it would certainly be a timely and well received boost to the sector that has effectively been shut since December 2020 (and parts of the sector even earlier). This would also go hand-in-hand with the recently announced “roadmap” that will see lockdown restrictions eased and the leisure and hospitality sector open its doors again. 

ii. Clarification and certainty over eligible supplies?

Since the temporary reduced VAT rate was announced in July 2020, there has been (as one would expect) lots of uncertainty in respect of what supplies were eligible for the relief. As per Schedule 7A, Group 16, item 1 of VATA 1994 “Supplies of a right of admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas and exhibitions and similar cultural events and facilities….” qualify for the reduced VAT rate other than some attractions subject to the cultural VAT exemption. HMRC have further clarified that the reduced VAT rate is also not applicable to any supplies regarded as a “sporting activity”.

HMRC’s guidance in respect of what supplies could be included within the temporary reduced VAT rate is limited. There remains some confusion of the relevant VAT rate in respect of supplies predominately for leisure/amusement purposes, but also include an element of sporting activity. Can a supply held predominately for leisure purposes be considered as “similar…facilities” (and therefore eligible for the reduced VAT rate) if it also includes some form of sporting involvement (e.g. children’s trampoline activity parks)? 

In the event the temporary reduced VAT rate is extended, HMRC could well extend, or seek to clarify that the reduced VAT rate is to be covered by other areas within the hospitality and leisure sector who to date, have not received confirmation whether its activities are eligible for the relief. 

iii. What to do if the temporary reduced VAT rate is not extended? 

There is also every possibility that the temporary reduced VAT rate will not be extended. Therefore, consideration is required how to maximise the benefit from the temporary-reduced VAT rate for the remainder of the eligible period. 

As HMRC did not introduce any anti-forestalling rules to accompany the temporary reduced VAT rate, normal tax point rules will apply. This allows businesses to obtain the relief on bookings which are pre-paid, or where invoices are issued up to 31 March 2021, even if the services are provided after this date. Therefore (subject to some anti-avoidance provisions), if the temporary reduced VAT rate is not extended, businesses should consider potentially triggering the relevant tax point on any planned future supplies, or consider business promotions prior to 31 March 2021, so that the VAT rate reduction can potentially be benefited from, even if the services are not to be provided until later in the year. 

Following the ‘roadmap’ announced by the Prime Minister on Monday 22 February 2021, we now have an understanding when the leisure and hospitality sector can potentially open its doors again. Whilst we can only speculate at this stage, hopefully when those doors open, it’s at a temporary reduced VAT rate at 5%....