Recently I got in touch to update you on the changes to the VAT rate for the hospitality sector that will have a big impact on how you account for VAT. Please find below some further details on how the change will affect you.
To summarise, you will benefit from the temporary reduced rate if you:
- Supply sleeping accommodation in a hotel or similar establishment
- Make certain supplies of holiday accommodation
- Charge fees for caravan pitches and associated facilities
- Charge fees for tent pitches or camping facilities
Commercial establishments providing lodging (furnished sleeping accommodation) and meals and other facilities, such as hotels, inns, boarding houses, hostels, motels, guesthouses, bed and breakfast establishments etc. that are VAT registered can reduce the rate of VAT charged on their fees from the standard rate of VAT of 20% to 5% between 15 July 2020 and 12 January 2021.
The main issues we were asked about were deposits, invoices and payments received before the change in VAT rate for hotel and holiday accommodation to be used after the change in VAT rate.
Most deposits serve as advance payments and you must account for VAT in the return period in which you receive the payment.
If you retain a deposit for a booking which your customer fails to take up VAT remains due.
If you have received a deposit, raised an invoice or received part or full payment for holiday accommodation before 15 July 2020 you will have charged VAT at the standard rate of VAT at 20%.
If the customer has borne the cost of the VAT, for example, the customer has been issued with a VAT invoice of £100 + VAT £20 = £120 and the invoice is reduced to £100 + VAT £5 = £105 then the £15 VAT saving must be passed on to the customer under the rules for unjust enrichment.
If a customer was issued with a standard invoice with a VAT inclusive price there is room to keep the VAT difference buy adjusting the VAT return. New bookings made from 14 July 2020 onwards held as VAT inclusive the customers would be paying the advertised “Gross price”.
For example, a daily rate on the 14 July 2020 is held at £50 VAT inclusive per night. The VAT rate on this day is 20% and the hotel therefore receives £41.66 of the £50. On the 15 July 2020 the price is still held at £50 VAT inclusive per night. The VAT rate on this day is 5% and the hotel therefore keeps £47.61 of the £50.
It is up the business to decide if they want to pass on the VAT savings to the customer.
A question that is coming up regularly is “what about booking taken now for holidays to be taken after 12 January 2021?”
When there is a change in a rate of VAT, the government legislation will usually have certain provisions that prevent businesses issuing sales invoices and receiving payments before the VAT rates increase again.These are known as anti-forestalling provisions and the rules can be quite complicated.
However, it has been a surprise that the VAT legislation that brought the VAT reduction, known as SI2020/728 did not include any anti-forestalling provisions. Based on this news, any invoices issued or payments received between 15 July 2020 and 12 January 2021 for holidays to be taken after 12 January 2021 can be charged at the rate of VAT of 5%.
Two examples of this would be
- Mr Jones books a holiday at VAT registered hotel on 15 August 2020 for £500. He pays the £500 and is issued with a VAT invoice. The stay with the hotel will be 5 April 2021 to 10 April 2021. The rate of VAT on this hotel stay would be 5%. As long as the full payment or a deposit with a VAT invoice for the full amount was issued before 12 January 2021 the booking would be liable to 5% VAT.
- A caravan park usually bills its customers 1 November for the season in the following year (1 March to 30 November). With regards to the November 2019 invoice, it is up to the caravan park if it wants to pro rata the site fees between 15 July 2020 and 30 November 2020 for the 5% VAT and pass on the costs to its customers. The November 2020 invoice for 1 March 2021 to 30 November 2021 can be invoiced in full in November 2020 and this would be liable to VAT at 5%. This would be a great opportunity for parks to work out there site fees for the next season as there is potential to increase the net price (before VAT) but still pass on a saving to the customer in the Gross price (including VAT).
Every business will have its own circumstances to consider when invoices and the above is only a guideline based on the general VAT rules. If you have any queries, please do not hesitate to contact us.