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As we emerge from lockdown, the Chancellor has introduced various financial support measures aimed at helping businesses recover, including a VAT reduction for the hospitality and tourism sectors.
You may have noticed the buzz around McDonald's becoming even more affordable—this is due to the VAT cut.
The goal is to encourage consumer spending by lowering prices, providing a boost to the economy in response to the impact of the Coronavirus pandemic, particularly for businesses affected by lockdowns and social distancing measures.
What is the VAT Reduction for Hospitality and Tourism Businesses?
The VAT rate has been reduced from 20% to 5% for restaurants, holiday accommodation, and tourist attractions in the UK from 15 July 2020 to 12 January 2021. This reduction applies to:
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Food
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Non-alcoholic drinks
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Hot takeaway food and hot takeaway non-alcoholic beverages (prepared on-site, not pre-packaged)
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Hotels, holiday rentals, and bed & breakfasts
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Pitch fees for tents and caravans
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Entry fees to attractions like theatres, circuses, zoos, and cinemas (though pre-prepared food inside the venue may not qualify)
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Please note, sporting events and cold takeaway food are excluded from the VAT reduction.
How to Apply the VAT Cut
Businesses are not obligated to pass the 5% VAT cut on to customers. If you’re making a purchase, it’s worth asking if the business is participating in the scheme.
If you are a VAT-registered business and choose to pass the VAT reduction on to your customers, you’ll need to adjust your records to reflect the 5% rate instead of the usual 20%.
Flat Rate Scheme Adjustments
For businesses using the Flat Rate Scheme, the flat rate percentages have also been adjusted in line with the VAT cut for the relevant sectors between 15 July 2020 and 12 January 2021:
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Hotel or accommodation: 0% (was 10.5%)
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Pubs: 1% (was 6.5%)
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Catering services, including restaurants and takeaways: 4.5% (was 12.5%)
You can check the full list of businesses eligible for the VAT reduction on the government website.