VAT rate reduction for tourism and hospitality
posted 10th July 2020
Yesterday the Chancellor announced a six month reduction of the VAT rate on certain hospitality and tourism services to 5% for the period Wednesday 15 July to Tuesday 12 January 2021. Although we would never look a gift horse in the mouth, this news is likely to benefit some in the sector more than others. Here, I have set out the details and what it may mean for the tourism and hospitality sector.
What services will benefit?
As mentioned in the Summer Economic Statement, the items benefitting are food, accommodation and attractions. Its never that easy for VAT though, so what do we mean by these categories:
Catered food and non-alcoholic drinks:
This will include food and non-alcoholic beverages sold for on-premises consumption (i.e. in restaurants, cafes and pubs and similar outlets), plus hot takeaway food and hot takeaway non-alcoholic drinks. Interestingly this does not extend to cold takeaway food and non-alcoholic drinks, so takeaway bottled water is ironically taxed at a higher rate than a takeaway fish and chips! This of course brings up lots of apportionment issues plus the classic "what is hot takeaway food?" question which gave us the "Pasty Tax" headlines.
Tourist accommodation
This includes hotels, pitch fees for caravans and tents and similar establishments. It follows that serviced apartments which are held out for tourists and visitors (i.e. non-residential) will also benefit. I have set out some detailed guidance for hotels and serviced apartments separately here.
Admission to attractions
The reduced rate applies to the following: theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and "similar cultural events and facilities". HMRC like the use of "similar" services in the tourism industry, but here they give examples such as a planetarium, botanical gardens, studio tours and factory tours.
HMRC also confirm that the reduced rate will not apply to admission to sports events.
The issue of VAT for admission to live web events is mentioned in the guidance. I would say this is perhaps the least helpful part of the guidance because it includes the traditional VAT answer of: "this depends on the circumstances in each case". Broadly speaking, online events must fulfill certain criteria to constitute "admission" to a live event rather than being classed under a separate category such as licencing rights, certain education services and other e-services. As such, it is best to check with an advisor on your individual case.
Its worth noting that where these services are covered by the cultural VAT exemption (normally only for certain non-profit making entities) the services will remain exempt.
What about TOMS services?
Unfortunately it has been confirmed that services sold within the Tour Operators' Margin Scheme rules will remain subject to 20% on the margin. We know that this is frustrating for many tour operators, however I'd note here that many UK purchases made by tour operators will benefit from the reduced rate, and purchases made in other EU countries should also benefit from similar VAT reductions in other EU member states. This of course depends though on to what extent the benefit is passed on by suppliers.
Please note that in-house services (i.e. services of UK accommodation, catering and/or attractions supplied from your own resources) which are included within TOMS sales will be subject to the reduced rate. HMRC have said that they would expect the same provisional percentage to be used, with any adjustments trued up in the year end annual adjustment.
One opportunity for many tour operators will be the use of the transport company scheme. In the same way that the transport company scheme effectively makes EU transport "zero rated" under TOMS, it may be possible for those with transport companies to use the scheme in the same way to effectively make sales of qualifying UK/EU accommodation, catering and attractions subject to the 5% rate (either on their own or as part of packages). In order to do so however, any contracts with suppliers must be made with the transport company, and invoices from suppliers must be issued to the transport company. In many cases, this admin burden may make the use of the transport company in these circumstances impractical. For businesses trading over the winter months though, the admin issues may be worth it!
What do we mean by the period 15 July to 12 January?
For VAT purposes, timings are everything. When we talk about services within the period 15 July to 12 January, we mean services with a "tax point" within this period. This is not necessarily the same date as the services actually take place.
As a refresher on tax points for VAT purposes, the actual tax point is the earlier of:
- The date a service is performed or completed;
- The date an invoice is raised; and
- The date of payment.
Also, if an invoice is raised within 14 days of this "actual tax point", the invoice date overrides this and becomes the actual tax point. (For example, let's say the service is completed on 31 December, payment is made on 1 January, and an invoice is issued on 13 January. The soonest date is 31 December. However, because an invoice has been issued within 14 days, the actual tax point becomes 13 January and the 5% reduced rate is missed out on).
This means that:
- Where invoices have been issued or payments made before 15 July for services taking place between 15 July and 12 January, the 20% rate will usually apply.
- If the service has taken place and/or payment made before 15 July, but an invoice is issued within 14 days of this first tax point, and the invoice is issued after 15 July, the 5% rate will apply.
- At the opposite end, where an invoice is issued or payment received prior to 12 January, but the service takes place after 12 January, the 5% rate will apply (but note the point on invoices being issued within 14 days too). This means there will be an opportunity for advanced bookings at the other end of the rate change.
Operators could instead opt for a special rule which allows the rate to be determined wholly by the date the service takes place. This however creates difficulties with regard to deposit payments already taken.
Who will benefit from the rate cut?
This is a difficult question and, as is often the case for VAT queries, "it depends"! This point is in part a legal issue and in part a commercial issue so the first point is to check the contractual position.
In the VAT legislation, there is a provision which states that, where a contract is made before a rate change but the contracted supply is made after the rate change, that, unless the contract provides otherwise, the price is increased or decreased by an amount equal to the change. So, for example, if the service price was agreed on 1 July but the tax point (i.e. earlier of the service taking place, invoice and payment date) is on 20 July, this provision applies and the reduction must be passed onto the customer.
However, where the service is booked after 15 July, if, contractually, you agree to sell something for £100 plus VAT, you must pass the reduction onto the customer. I am not a lawyer, but would expect that where the contract says "£100 plus 20% VAT", you would also be obliged to pass the rate change on. In these cases, only £105 can be charged.
Where there has been no mention of VAT contractually, or anywhere else within the agreement or price offer (or indeed the price is quoted as "VAT inclusive" only with no mention of the rate), then there is no obligation to pass on the rate change. This may then become a commercial decision and of course there are arguments both ways.