New Reduced Rate of VAT for Hospitality Sector

The government announced in the Spring Budget 2021 that the temporary reduced rate for hospitality of 5% VAT will be extended for a further six-month period at 5% until 30 September 2021.

Affecting certain supplies relating to hospitality, hotel and holiday accommodation and admission to certain attractions, the reduced rate was initially introduced 15 July 2020 to 12 January 2021. This period was extended to 31 March 2021. Announced at the Spring Budget 2021, the temporary reduced rate is now extended 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.

Who is eligible exactly?

This measure aims to support businesses and protect 2.4m jobs following lifting of COVID-19 lockdown, with reduced rate of VAT (5%) to certain supplies in the tourism and hospitality sectors – supporting the reopening of the economy and to help to reestablish eating out in restaurants. The following supplies attract this reduced rate of 5%:

• Hospitality catering including hot and cold food and drink consumed on-premise and hot takeaway food and drink consumed off-premise
• Accommodation. namely provision of hotel/holiday accommodation, pitch fees for caravan parks/tents/related facilities
• Attractions admission not covered by the cultural exemption

Also:

• zero rate to large range of food in UK, including range of cold takeaway food
• zero rate to limited number of drinks but expressly excludes alcoholic drinks
• exemption from VAT to:
  • 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, supplied by a public/eligible body

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.

How it will help

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.

Expected – a negative impact on inflation in the period where the measure applies and positive impact in the following year (compared against a return to standard VAT rate).

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.

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.

For any questions about these changes, there is a contact email for HMRC at VATtourismandhospitality@hmrc.gov.uk.