Reduction in the VAT rate: Practical points to consider

The reduction in VAT rate to 5%

Businesses providing services in the hospitality, holiday accommodation and attractions sectors will benefit from the reduction of standard rate VAT from 20% to 5%, effective from 15 July, and should be considering the wider potential opportunities that this can offer.

Those organisations need to implement the necessary changes to their accounting systems to make sure that, with effect from the 15 July, VAT at 5% is accounted for to HMRC on the qualifying supplies. This reduction is temporary, and the rate is to revert back to 20% after 12 January next year.

The reduction of the VAT rate on sales will not affect the ability to recover standard rate VAT at 20% incurred on purchases.

Supplies that span 15 July

It is possible that a VAT liability (tax point) has been crystallised for supplies that will straddle 15 July. This could be because an advanced payment has been made by the customer, or the supplier had issued a tax invoice for a future supply. The tax point rules mean that a VAT liability would be created at this time, and therefore, if a tax point was created before 15 July, then the supply would be subject to VAT at 20%. However, it is possible to benefit from the reduction in the rate for that element of the supply taking place on or after 15 July.

For example, a customer may have made an upfront payment for the stay in a holiday apartment for a week that includes 15 July, and would create an actual tax point at that time. However in this instance, it is possible to apportion the upfront payment to split it between an amount liable to VAT at 20%, for the days of occupation up to 15 July, and the remaining amount liable to VAT at 5% for the days of occupation from 15 July onwards.

Monthly VAT returns

The reduction in VAT rate is likely to mean that the profile of the VAT accounting of those businesses that are affected will change significantly for six months. Depending on their cost base, and the amount of costs that are subject to VAT at 20%, those businesses may now find that they are an overall reclaimer of VAT rather than a net payer. In this instance, it is worth considering if moving to monthly VAT returns for six months may provide cash flow benefits.

However, the potential cash flow benefits of this change need to be considered in the conjunction with the administrative time involved to apply to HMRC to change filing dates, and adapting VAT processes so that returns can be prepared and filed monthly rather than quarterly.