Summer Economic Update - Indirect Taxes

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Tom Kivlehan - Partner and Head of Indirect Taxes
Tom focuses on pragmatic strategies for mitigating undue VAT and Duty costs and has particular experience of global supply chain issues having worked on global projects for several high profile organisations. Tom leads our Indirect Tax practice in the UK and sits on the BDO International Indirect Tax Steering Committee focusing on the service levels and requirements of global businesses.

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The UK Government has today announced the following VAT measures including a temporary reduction to the Standard Rate of VAT from 20% to 5% for the hospitality sector. This VAT cut, which is in place until 12 January 2021, is designed to boost customer demand in response to the economic crisis caused by the Covid-19 pandemic. This is great news for the hospitality sector as business reopen to the public albeit on a reduced capacity basis.

Temporary VAT cut for food and non-alcoholic drinks

From 15 July 2020 to 12 January 2021, the reduced (5%) rate of VAT will apply to supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises across the UK. Read more detail.

Temporary VAT cut for accommodation and attractions

From 15 July 2020 to 12 January 2021, the reduced (5%) rate of VAT will apply to supplies of accommodation and admission to attractions across the UK.

Further guidance on the scope of these reliefs will be published by HMRC in the coming days.

The changes will have a number of consequences for businesses to consider including:

  • Systems changes both (EPOS, online booking engines and back office) to ensure that the correct amount of VAT is charged to customers and declared to HMRC
  • Changes to sales invoices/VAT till receipts
  • Pricing – as with the previous VAT reductions, businesses will need to decide whether the pass the reduction onto the consumer or hold their prices
  • Impact of the change reverting back to 20% on 12 January 2021 and how this may impact VAT reporting for return periods that may have both 5% and 20% rate supplies
  • For Tour Operators, the reduction in VAT rate may have the impact of increasing the profit margin achieved from the sale of UK TOMS supplies and have the effect of increasing the VAT payable under the Tour Operators Margin Scheme.

With regard to applying the correct rate at the right time (the “time of supply”/”tax point”), the existing VAT legislation provides for supplies that span a change of rate as follows:

  • Special rules can be adopted for the supplies that are made around the time of the reduction. Suppliers can choose to apply the rate of VAT in force at the time of the basic tax point where this is different from the rate that would otherwise apply under normal tax point rules. There are some exceptions to these special rules and they cannot be used for supplies under self-billing arrangements, for example.
  • The existing legislation also describes a change in VAT rate that occurs between the date a contract is finalised and the supply being made. Unless the contract specifically provides otherwise, the contract price will be subject to adjustment to take into account the reduction.

The practical systems changes lend themselves well to the Making Tax Digital for VAT (‘MTDfV’) considerations businesses have already been thinking about for a while. In light of C-19 and Brexit, along with MTDfV and a VAT rate change, now would be a good time for hospitality businesses to prioritise VAT to ensure both compliance and maximising VAT efficiency at a time when cost savings are particularly important. 

Eat Out To Help Out Scheme

In order to support around 130,000 businesses and to help protect the jobs of their 1.8 million employees, the government will introduce the “Eat Out to Help Out” scheme to encourage people to return to eating out. This will entitle every diner to a 50% discount of up to £10 per head, including children, on their meal, at any participating restaurant, café, pub or other eligible food service establishment. The discount can be used unlimited times and will be valid all day Monday to Wednesday on any eat-in meal (including on non-alcoholic drinks) for the entire month of August 2020 across the UK.

Participating establishments will be fully reimbursed for the 50% discount - businesses will need to register through the Government Gateway here. Each week in August, businesses can then claim the money back, with the funds in their bank account within 5 working days, read further HMRC guidance.

Read more on the VAT treatment of Eat Out To Help Out.


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