Introduction of a new reduced rate of VAT for hospitality, holiday accommodation and attractions
Published 3 March 2021
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Who is likely to be affected
Businesses that make certain supplies relating to hospitality, make supplies of holiday accommodation or charge for admission to certain types of attractions.
General description of the measure
The government announced on 8 July 2020 that it intended to legislate to apply a temporary 5% reduced rate of VAT to certain supplies relating to hospitality, hotel and holiday accommodation and admission to certain attractions.
The reduced rate was initially introduced to last for a temporary period between 15 July 2020 and 12 January 2021. This period was subsequently extended to 31 March 2021.
The government announced at Budget 2021 that the temporary reduced rate will be extended for a further six-month period at 5% until 30 September 2021.
A new reduced rate of 12.5% will then be introduced which will end on 31 March 2022. The scope of the relief will remain unchanged.
Policy objective
To support businesses and protect 2.4 million jobs following the lifting of the COVID-19 lockdown, the government have temporarily applied a reduced rate of VAT (5%) to certain supplies in the tourism and hospitality sectors.
This was aimed at supporting the reopening of the economy following the outbreak of the coronavirus pandemic and help to re-establish habits such as eating out in restaurants.
The temporary 5% reduced rate will come to an end on 30 September 2021 and will then be replaced with a 12.5% reduced rate that will be effective until 31 March 2022: both will apply across the UK.
Background to the measure
This temporary relief was introduced as an urgent response to the coronavirus emergency. Its main objective was to support businesses severely affected by the coronavirus pandemic and social distancing measures.
Before the current reduced rate was introduced, the standard rate of VAT (20%) applied to all supplies of restaurant services, hot takeaway food, holiday accommodation and admission to many attractions.
This measure extends the temporary reduced rate of 5% which applies to these supplies until 30 September 2021 in order to provide continued support to businesses most severely impacted by measures taken to address the pandemic.
It also introduces a temporary reduced rate of 12.5% until 31 March 2022 in order to assist with the transition back to the standard rate of VAT as a means to further assist the most severely impacted businesses.
As the government has decided to implement this extension as an emergency measure to support the reopening of businesses, it has not been possible to consult in the time available.
Detailed proposal
Operative date
The initial reduced rate of 5% has had effect from 15 July 2020. The subsequent 12.5% reduced rate will have effect from 1 October 2021 until 31 March 2022. At this point the standard rate will apply.
Current law
Previously the standard rate of VAT applied to most goods and services supplied by the tourism and hospitality sectors. However, groups 14, 15 and 16 were introduced into Schedule 7A VATA when the temporary reduced rate came in to force which results in the following supplies attracting the reduced rate of 5%:
- Hospitality: supplies in the course of catering including supplies of hot and cold food and drink to be consumed on the premises and supplies of hot takeaway food and drink to be consumed off the premises
- Accommodation: the provision of hotel and holiday accommodation, pitch fees for caravan parks and tents and related facilities
- Attractions: admission to attractions not covered by the cultural exemption (see below)
Group 1, Schedule 8 to the VATA applies a zero rate to a large range of supplies of food sold in the UK, including a large range of cold takeaway food. It also applies a zero rate to a limited number of drinks but expressly excludes alcoholic beverages.
Groups 1 and 13 of Schedule 9 VATA applies an exemption from VAT to the following supplies respectively:
- most grants of an interest in, or a right to occupy, land excluding hotel and holiday accommodation and pitch fees for caravans and tents
- admission charges to museums, galleries, art exhibitions, zoos and theatrical, musical or choreographic performances of a cultural nature, when supplied by a public body or an eligible body (as defined)
The previous measure also amended regulation 55K of the VAT Regulations 1995 to ensure that businesses in these sectors that use the flat-rate scheme will also be able to benefit from the reduced rate for the period that it applies.
Proposed revisions
The temporary 5% reduced rate will be extended until 30 September 2021. The 12.5% reduced rate will then come in to force on 30 September 2021 until March 2022. Regulation 55K of the VAT Regulations 1995 will also be amended when the 12.5% reduced rate is introduced to ensure that businesses in these sectors that use the flat-rate scheme will also be able to proportionately benefit from this rate for the period that it applies.
It is intended that this legislation will be included in Finance Bill 2021. The extent and application will be the whole of the United Kingdom.
Summary of impacts
Exchequer impact
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| - | -4,720 | - | - | - | - |
These figures are set out in Table 2.1 of Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2021.
Economic impact
This measure is expected to boost cash flow and viability of businesses in the hotel, hospitality and tourism sectors. Where businesses opt to pass some or all of the saving on to customers this may result in increased spending in these sectors.
This is expected to have a negative impact on inflation in the period for which the measure applies and positive impact in the following year (compared against a return to the standard VAT rate).
Impact on individuals, households and families
This measure is expected to continue to have a positive impact for individuals who go out for meals, buy hot takeaway food, stay in hotels or other holiday accommodation or visit the types of attractions outlined above.
This measure extends the temporary reduced rate of 5% for six months, until 30 September 2021. It then introduces a temporary reduced rate of 12.5% until 31 March 2022 to avoid a cliff edge at the end of the 5% period.
The extension and introduction of the temporary reduced rate of 12.5% are being introduced to continue supporting the cash flow and viability of businesses following multiple periods of closure throughout the coronavirus pandemic.
Customer experience is expected to improve given the positive nature of this measure.
This measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that this measure will have impacts on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a positive and significant impact upon more than 100,000 businesses by substantially reducing the VAT they would be ordinarily required to charge and account for to HMRC. One off costs will include familiarisation with the changes and could include changes to IT systems to account for a new rate and / or menus to alter prices.
It is expected that the introduction of the temporary 12.5% reduced rate may have an impact on system providers, as they will have a one off cost to familiarise themselves with this change and could also incur one off cost to make adjustments to their software to allow businesses to account for VAT at this new rate.
However, these costs for system providers are expected to be negligible. HMRC will be consulting with industry stakeholders to gather further evidence on implementation costs and the government will update its estimates in due course.
There are not expected to be any continuing costs.
Customer experience for impacted businesses is expected to improve given the supportive and positive nature of this measure.
This measure is not expected to have any impact on civil society organisations.
Operational impact (£m) (HMRC or other)
HMRC costs for this change are estimated to be negligible.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
This measure will be monitored through information collected from tax returns and receipts, as well as through communication with affected taxpayer groups.
Further advice
If you have any questions about these changes, please contact HMRC at [email protected].