Temporary VAT cut for the hospitality sector

8th July 2020

The Chancellor announced on 8 July 2020 that VAT rates would be cut from 20% to 5% for businesses operating in the hospitality sector such as restaurants, cafes, pubs, bars and similar premises.

The cut applies to suppliers of catering on premises, and hot takeaway food and non-alcoholic drinks, so it is not a blanket cut on all food and beverages. The cut also applies to charges for admission to attractions such as zoos and theme parks, as well as accommodation in hotels, B&B’s etc.

Further guidance will be issued over the next few days as to the scope of this cut. The cut takes effect on 15 July 2020 and will last until 12 January 2021.

Whilst the cut will be welcome by hard pressed businesses in these sectors, it is noticeable that the cut is time limited unlike many parts of the continent which have long applied a reduced-rate to hospitality and tourism related sectors, and which UK businesses have long lobbied for.

Clearly the measure is aimed at stimulating demand in the sector and the Chancellor must be hoping that affected businesses will pass on the cut to consumers through lower prices, and if this is done it could well stimulate demand. However, there is no obligation on businesses to pass on a price reduction and if it is common to price goods or services in the sector on a VAT inclusive basis, rather than a net plus VAT basis, then a room tariff of £200 per night is £200 per night irrespective of whether it is inclusive of 1/6th VAT at 20% or 1/21st VAT at 5%.

There is little that bars and restaurants can do if they wanted to avail themselves of a saving, but a hotel or guest house taking a booking on 8 July could take the booking but defer taking any deposit until 15 July since the point at which the VAT rate is set is the earlier of the receipt of payment or the date of issue of a VAT invoice. As VAT is due at the time a deposit is taken, if it is not taken until after the rate cut the business will have the choice of retaining the difference in the VAT amounts or of passing the saving on to the customer.

Phil Salmon

Partner, Co-Head of VAT
+44 20 7969 5611
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