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%....

Mistaken issue of zero rate certificate – Penalty overturned

Westow is a local club run by members with no paid staff, but it is not a registered charity. It is a registered Community Amateur Sports Club (CASC) under the Corporation Tax Act 2010, s58. The club overturned a penalty for mistakenly issuing a zero rate certificate for the construction of a new cricket pavilion.

The Upper Tribunal accepted Westow Cricket Club’s argument that it had a reasonable excuse to issue an erroneous zero rate certificate, overturning the FTT’s original decision.

Background

Westow is a local club run by members with no paid staff, but it is not a registered charity. It is a registered Community Amateur Sports Club (CASC) under the Corporation Tax Act 2010, s58.

A CASC under current HMRC rules is not treated as a charity for VAT purposes and as such cannot issue a certificate for zero-rating.

The case hinged around correspondence between Westow and HMRC. Like many community and charitable bodies Westow found the VAT rules difficult to follow and wrote to HMRC to get clarification. Unfortunately, like many before them Westow ended up with what it believed was guidance, but later discovered it wasn’t.

HMRC said that it could not give a definitive response but referred Westow to VAT Notice 708: Buildings and Construction and in particular sub-paragraph 14.7.4 which covered use of a building as a village hall or similar. Westow took the letter as a clear steer towards issuing a certificate of zero-rating to its builder.

Westow was subsequently informed by HMRC that the zero-rating certificate was invalid and it received a penalty notice under VATA 1994, s62.

FTT decision  

Westow’s case was that it was a lay person in these matters and relied on HMRC’s advice and acted reasonably. The FTT had some sympathy but decided that this was not a reasonable excuse and that Westow should not have relied on the HMRC response as definite advice. The FTT did criticise HMRC for stating on one hand that it could not give advice but then on the other offering a view.

The FTT’s decision was based on two factors.

  1. HMRC’s letter did not consist of advice but rather pointed Westow towards the public notice, the comments regarding use as a village hall or similar were couched in the term ‘it appears to do so’ and therefore the letter should not have been taken as definitive advice.
  2. Even had the HMRC letter muddied the water, Westow should not have gone ahead and completed the certificate when it knew it was not a charity, and therefore did not qualify for zero-rating.

The UT’s discussion

The UT concluded that the FTT should have considered Westow’s behaviour in the light of HMRC’s letter and other prevailing matters. The UT said that the FTT had taken a too legalistic view of the matter given that in reasonable excuse cases there should be a degree of flexibility and informality where the taxpayer is not legally represented.

There was also the confusion of CASC status. The case of Eynsham Cricket Club is currently before the Court of Appeal on the question of whether zero-rating can extend to CASCs. It is therefore not unreasonable for Westow to have completed the certificate reasonable in these circumstances.

Remaking the decision

In finding for Westow the UT decided not to refer the matter back to the FTT but under tribunal rules decided to remake the decision.

Westow acted reasonably in completing the zero-rating certificate. In particular the comments made by the HMRC officer regarding paragraph 14.7.4 of the VAT notice that the building constituted a village hall or similar building were sufficient for Westow to read and believe that it was guiding them to the conclusion that their building satisfied the zero-rating conditions.

Westow’s explanation in its letter to HMRC resonated with that in Eynsham where the UT had ruled that the pavilion met the village hall test. There was no need for Westow to seek further advice on the charity issue, it had made it clear in correspondence that it was a not-for-profit body.

 

 

Comment

Charity trap

Taxpayers in the charity and not-for-profit sector need to take great care when issuing zero-rating certificates as the penalty regime is harsh and expensive if they get it wrong, which is why taking professional advice makes sense in potentially complex matters.

 

Postponed import VAT statements

From 1 January 2021 you may be able to account for import VAT on your VAT Return.

Unless you have delayed your customs declaration, each statement will show the total import VAT postponed for the previous month.

If you account for your import VAT on your VAT Return, you’ll get a postponed import VAT statement online.

Unless you have delayed your customs declaration, each statement will show the total import VAT postponed for the previous month.

Your statements will become available to view in the first half of each month. You will need to download and save a copy as the statements will only be available for 6 months online.

This system requires an online gov.uk account and a UK EORI.