Hospitality VAT cut: Everything your small business needs to know

The summer statement on 8 July included two measures designed to help the UK tourism and hospitality sectors – two areas hit especially hard by the COVID-19 crisis.

Alongside the Eat Out to Help Out discount, chancellor Rishi Sunak announced a temporary cut in VAT to support hospitality and tourism businesses struggling to recover from the impact of the lockdown.

The guide will tell you everything you need to know about the hospitality/tourism VAT cut, including how it works, who is eligible, and what is excluded.

It covers the following areas:

How does the hospitality VAT cut work?

The hospitality VAT cut (or, to give it its full title, the “temporary reduced rate of VAT for hospitality, holiday accommodation and attractions”) is, as the name suggests, a temporary cut in the VAT that businesses pay on certain goods and services.

This last point is crucial – the cut applies to certain things that businesses sell rather than certain types of businesses.

So, from 15 July 2020 to 12 January 2021, the VAT rate on certain hospitality goods and services will be cut from 20% to 5%.

✅ The cut will apply to the following:

• Food and non-alcoholic beverages sold for on-premises consumption (dine-in food and non-alcoholic drinks)
• Hot takeaway food and hot takeaway non-alcoholic beverages
• Sleeping accommodation in hotels, hostels etc.
• Holiday accommodation
• Pitch fees for caravans and tents (and associated facilities)
• Admission to attractions like theatre, circuses, concerts, music festivals, museums, zoos and cinemas*

*this only applies where the attraction doesn’t already benefit from the cultural VAT exemption

❌ as you may have noticed, the hospitality VAT cut does not apply to alcoholic drinks

Obviously, all this only applies to businesses that are registered for VAT and currently pay VAT tax (so this change won’t affect some small businesses).

Is my business eligible for the hospitality VAT cut?

As mentioned earlier, the reduced 5% rate of VAT applies to the products and services in the bullet points above, it does not only apply to certain types of businesses (unlike the Eat Out to Help Out discount for example).

So, if your business involves supplying any of the products or services listed above, then your business can benefit from the hospitality VAT cut.

Do I have to pass on hospitality VAT cut savings to my customers?

No.

It’s entirely up to you whether you use the VAT savings to cope with the cost of running your business during the COVID-19 outbreak (investing in personal protective equipment (PPE) and extra cleaning for example), or reduce your prices to encourage custom.

The decision will depend on the circumstances of your individual business.

Pub chain Wetherspoons for example has announced that it will reduce the prices of all drinks and meals in response, but obviously their finances are a world away from most small businesses.

Do I need to register for the hospitality VAT cut?

Again, no.

Unlike some government schemes, you don’t need to register for the hospitality VAT cut in advance, as it applies to tax that is collected when you file your tax return.

So, all you’ll need to do is record the lower rate of VAT in your accounts, and make sure you submit the correct info in your tax return.

Accounting software can really help with this, many of the leading providers let you easily record a lower rate of VAT for certain transactions.

If you’re not using one already, then check out our guide to the best small business accounting software to see which one might be right for you, and to see what a difference it could make to your small business.

Summary

• From 15 July 2020 to 12 January 2021, the VAT rate on certain hospitality/tourism gods and services will be reduced from 20% to 5%
• Alcoholic drinks are excluded from the VAT cut
• The cut applies to particular products/services, not particular businesses
• You don’t have to reduce your prices as a result (but obviously can if you want to)
• There is no need to register for the cut, you just need to record the reduced rate in your accounts