A temporary cut to VAT from 20% to 5% on food, accommodation and attractions in the hospitality sector has been put in place for the period 15 July to 12 January 2021.
This will apply, across the UK, to:
- Food and non-alcoholic drinks supplied by restaurants, pubs, bars, cafés and similar premises, including hot takeaways;
- Admission to attractions such as cinemas, zoos and theme parks.
There may be situations where the customer has already agreed a fee / been invoiced / has paid for the service at the higher VAT rate. At a basic level, the consequences are:
- Where a price has been agreed but not yet invoiced or paid, the amount payable must be altered unless there is an express term in the contract which stipulates that the gross price is fixed.
- When an invoice has been issued or payment received, the business can (but is not required to) lower the rate charged to the extent that goods are removed or services performed after the change of rate. The supplier has to issue an appropriate credit note within 45 days of the change of rate. If the lower rate is not used, the business should pay to HMRC the full amount of the VAT charged at the old, higher rate.
- Where continuous supplies of goods or services are made which cover a change of rate and the invoice/payment date results in a higher rate than that in force when the goods or services were actually removed or performed, the business can (but is not required to) account for VAT at the new rate to the extent that the provision occurs after the change of rate. The supplier must issue a credit note within 45 days of the change of the change of rate. If the lower rate is not used, the business should pay to HMRC the full amount of the VAT charged at the old, higher rate.
- Where goods are removed or services performed before the change of rate provided that payment was not received before the removal of the goods or the performance of services and the invoice is issued after the change of rate but not later more than 14 days after the removal of the goods or performance of the services, then the supply may benefit from the reduction in rate.
However, businesses that have advised HMRC in writing that they do not wish to apply the 14 day rule are unable to benefit in these circumstances. There are also a number of businesses that have agreed an extension to the 14 day rule with HMRC. Such an extension would allow businesses more time to take advantage of the reduction in the VAT rate.
- Any invoices issued in advance at the old rate are invalid to the extent that the date shown on the invoice is after the change of rate.
Businesses should take care not to be pressured into incorrect adjustments of VAT due as this would result in them being exposed to assessments and penalties.
The commercial considerations are different when the VAT rate falls from when it increases, and the notes above are not in themselves a basis for definitive action.
How can we help?
Those who may be affected by the rate reduction should take appropriate advice.
If you would like to discuss how these changes may affect you, please contact Paddy Behan (Partner, Indirect Tax). Paddy is able to advise on the full range of VAT for businesses.
Phone: 020 7291 5652