This is good news for the hospitality industry, especially as the winter months will have the dual challenge of both Covid-19 restrictions and higher overheads for many businesses (electricity and gas etc) coupled with lower sales.
Just to recap, the 5% rate applies to the following main supplies:
- Food and drink – on the premises supplies of food and drink, hot take away food and hot take away drinks, both excluding alcoholic drinks .
- Holiday accommodation – hotels, caravan sites, guest houses, camp sites.
- Admission fees to tourist attractions – such as zoos, theatres, fairs, amusement parks etc.
HMRC clarifies reduced rate pointsThe Association of Taxation Technicians (ATT) raised a number of specific questions with HMRC about some of the technical details of the reduced rate, and the HMRC replies have now been published.
Here are a couple of practical issues that have been helpfully clarified by HMRC.
‘Spirit and mixer’ and ‘pie and pint’ offersMixed supplies is always a controversial subject with VAT. The ATT suggested that a ‘gin and tonic’ could be classed as a single supply of a non-alcoholic drink charged at 5% VAT because the tonic has more fluid than a gin. This is a spirited proposal by the ATT but HMRC confirmed that it is a single supply of an alcoholic drink and subject to 20% VAT. The punters are interested in the gin and the tonic is an incidental extra.
However, a ‘pie and pint’ offer ordered inside a café or pub is a mixed supply with output tax apportionment needed, because customers expect both food and drink – ie 20% VAT is payable on the pint and 5% VAT on the pie – assuming that the pint is not alcohol-free of course.
Admission vs participationThe word ‘admission’ means the right to enter a site, event or location. There has been some confusion where a customer pays a fee for an individual ride and whether this is classed as admission.
HMRC’s reply to this question is as follows: “Where there are charges for individual rides, in order to be considered an attraction that is eligible for the reduced rate, the ride must be similar to that of an amusement park or fairground in its own right.” This confirms that participation fees are excluded, unless the entrance and pricing structure specifically qualifies as ‘admission.’
Interest free loanI was concerned that many construction industry businesses would be faced with a double VAT hit next spring. This is because the adverse cashflow impact of the new reverse charge system due to take effect on 1 March 2021 would be swiftly followed by the repayment date of 31 March 2021 for VAT deferred on payments due between 20 March and 30 June 2020.
This cliff edge payment date has been made optional by the Chancellor, because the business can apply for the VAT deferred to be repaid over the following eleven months, effectively an interest free loan.
The reason that builders will have an adverse cashflow with the new reverse charge system is that instead of collecting VAT and retaining it in their bank account for up to three months before their next VAT return is submitted, VAT will no longer be charged on many supplies because the customer will account for VAT instead.