The 5% rate has been in place since 15 July 2020 and applies to most supplies made by pubs, restaurants, hotels, caravan parks, tourist attractions, cafes, zoos and many other businesses, but does exclude the sale of alcoholic drinks.
The 5% rate will increase to 12.5% on 1 October 2021 and the 12.5% rate will subsequently rise to the standard rate of 20% on 1 April 2022.
These reduced rates were put in place as a result of the pandemic to boost the hospitality industry. With the recent rate changes the Government did not apply any anti forestalling legislation and therefore if a business receives an advance payment before 1 October 2021 for a supply made on or after this date, the VAT rate will still be 5% based on the payment date. The normal tax point rules are applied, usually based on the invoice or payment date whichever comes first, indeed HMRC confirmed last year the absence of such anti forestalling legislation was specifically intended to help the hospitality industry, in that advance payments provided important working capital to cash stretched businesses.
Therefore hospitality clients who sell goods and services on a VAT inclusive basis who can encourage customers to pay before 1 October 2021 will directly increase the bottom line profit of their business. For those where prices are quoted on a VAT exclusive basis there is still a benefit in encouraging clients to pay earlier before the rate changes to boost their cash flow.
Therefore, those within the hospitality industry have a marketing opportunity to boost income streams and potentially profits before 1 October 2021 and likewise the rules will also work on the same basis as the VAT rate increases from 12.5% to 20% on 1 April 2022.
Please contact us to discuss this further.