On 1 October 2021 a new VAT rate of 12.5% will be introduced for most sales made by a hospitality business. How will you deal with the rate change in your purchase records and what savings can you make using the tax point rules?
What supplies are affected?
A temporary 5% rate of VAT has applied to many supplies of goods or services sold in the hospitality industry since 12 July 2020. This rate will increase to 12.5% on 1 October 2021 and then revert to 20% on 1 April 2022. It is sensible to divide the affected supplies into three different categories:
- food and drink sales – pubs, cafés, restaurants, members’ clubs, fast food takeaways, etc.
- overnight accommodation – hotels and similar establishments, caravan parks, camp sites, holiday cottages
- admission fees to tourist attractions – the Chancellor’s initial speech referred to “cinemas, theme parks and zoos” but the 5% rate is much wider than these three outlets.
Tip. The reduced rates have never applied to sales of alcoholic drinks, which have always been standard-rated.
Prepaying for some expenses
The absence of anti-forestalling legislation means that goods or services invoiced or prepaid before 1 October 2021 will still be subject to 5% VAT, even if they are purchased or consumed after this date. In other words, normal tax point rules will apply. This creates a potential VAT saving for your business.
For example, you might think that the rate change is not relevant if your business is able to fully claim input tax on its expenses, i.e. it is not partially exempt. But think about your business entertaining expenditure, which is input tax blocked unless the entertaining relates to your staff or, in limited cases, your overseas customers.
Example. Lawyers Ltd has fixed a date of 20 November 2021 for a big annual dinner for its main customers and suppliers. The company’s staff attending the event will act as hosts for the non-employees, i.e. their costs are also input tax blocked. The cost will be £100 per head plus VAT for a three-course meal and entertainment. The company can save VAT of £7.50 per head by prepaying for the event before 1 October 2021 because of the tax point rules .
Tip. There is no VAT saving to be made by prepaying for alcoholic drinks that will be given to the guests, such as wine at the tables or champagne on arrival, because these products are standard-rated anyway.
The VAT fraction for a rate of 12.5% is 1/9. So, for example, if you pay £45 including VAT for a pub meal, then the VAT element of the expense is £5.
For the first time since VAT was introduced in 1973 there will be four rates for you to deal with on your expenses, i.e. 0%, 5%, 12.5% and 20%. It is therefore important that your purchase ledger staff carefully check each purchase invoice to ensure that input tax is claimed at the correct rate.
Tip. Some of your purchase invoices might be for multiple supplies, where only some of the expense is subject to the new rate of 12.5% VAT, so extra care is needed here. For example, a pub meal that includes alcoholic drinks.
If you cannot fully claim input tax on an expense, consider prepaying it before 1 October 2021 to benefit from a 7.5% VAT saving. Check that the supplier charges the rate based on normal tax point rules, i.e. the advance payment or invoice date rather than when you consume the goods or services.