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VAT Treatment of Deposits, Flat Rate Scheme and Hospitality VAT Reduction

Date posted: 6th Aug 2020

When the Chancellor announced a temporary cut in the rate of VAT for the hospitality sector and attractions in his Summer Statement on 8 July there were a number of areas that needed clarification. The reduction applies to supplies made between 15 July 2020 and 12 January 2021. HMRC have now set out more details of which supplies will attract the 5% temporary rate as well as the impact on invoicing, deposits and the flat rate scheme.

What does the 5% temporary VAT rate apply to?

The temporary 5% rate applies to the following supplies, but is not an exhaustive list:

  • Catering, including hot takeaway food
  • Accommodation in hotels, guest houses and similar places
  • Tourist attractions such as theme parks, zoos, theatres and cinemas

Note that as far as catering is concerned, the 5% rate only applies to food and non-alcoholic drinks. The 20% rate continues to apply to alcoholic drinks.

Please contact us if you are unsure as to whether the 5% rate applies to any of your supplies.

VAT treatment of deposits

It is fairly common, particularly in the summer holidays, to pay a deposit when booking a hotel or self-catering accommodation but how should the deposit be accounted for?

HMRC have confirmed that the hotel has the option of charging VAT according to the ‘basic tax point’ (dates of the stay) rather than the ‘actual tax point’ (invoice/payment dates).

For example where the customer paid a non-refundable £300 deposit in February 2020 for a £1000 holiday in Cornwall in August, using the actual tax point, the hotel would account for 20% VAT on the deposit received in February 2020 and 5% on the balance payable after 15 July 2020.  The hotel could choose to use the basic tax point rule which would mean that the 5% rate would apply to the entire cost of the stay and make an adjustment for the VAT already accounted for.

Please contact us if you need advice on dealing with the invoicing or accounting for such transactions.

Interaction with VAT flat rate scheme

Small businesses with turnover below £150,000 may join the VAT flat rate scheme which makes their VAT accounting much simpler as they merely pay HMRC a percentage of their VAT inclusive turnover.

The temporary reduction in the rate of VAT from 20% to 5% reduces the flat rate percentages for affected businesses as set out below:

Type of Business 15 July 20  to 12 Jan 2021 From 13 January 2021
Catering services including restaurants and takeaways 4.5 12.5
Hotel or accommodation 0 10.5
Pubs 1 6.5

Should you have any queries on the above or need further support, please contact our tax team here, who will be happy to assist.

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