Business which market their Christmas offering and secure Christmas deposits and payments soon stand to benefit from the current 5% VAT rate which applies to the sector until 30 September.
This Christmas gift for businesses is wrapped up in the HMRC VAT reduction scheme.
Mike Innes, business development director at Hall Morrice explains, “The VAT rate remains at 5% for hospitality businesses until the end of September when it rises to 12.5%. This means that if a business issues an invoice dated before 1 October or receives advance payment for an event before 1 October – such as for Christmas parties and lunches – then the lower VAT rate of 5% can apply to this payment.
“Any customer payments made before 1 October will directly increase the bottom-line profit of the business, and hospitality businesses are all still in need of support as they continue their pandemic recovery.
“For example, an advance payment of £300 for a Christmas event paid before 1 October will attract a VAT liability of £14.29. If this payment is received after this date, then the VAT liability for the business will be £33.33.
“Hospitality businesses may have been waiting to see what their sector looked like after the lifting of restrictions before creating their Christmas packages for 2021, but those who can launch their Christmas marketing now, and secure advance payments before the end of September stand to benefit. This will give working capital to hospitality businesses when they need it most.”
The common policy for HMRC reduction packages is to introduce anti-forestalling legislation as part of the scheme. Anti-forestalling legislation means that advance payments made before the rate increases cannot benefit from the reduced rate if the goods or services are supplied after the period when the reduced rate applied.
The government did not apply anti-forestalling legislation to the VAT reduction for hospitality, with the intention of supporting the sector. Prepayments made before the end of September for hotel rooms will also attract the 5% VAT rate.
Mike Innes continues, “Of course, this benefit is a two-way street as businesses which are considering Christmas bookings for staff will also benefit from the 5% VAT rate. It may also be worth businesses which will have staff staying in accommodation beyond the end of September to prepay these hotel stays, as well as Easter events”
The reduced VAT scheme excludes alcoholic drinks. Under this scheme VAT will rise to 12.5% on 1 October for this sector before returning to the standard 20% rate on 1 April 2022.
For advice on how Hall Morrice can assist you with the VAT reduction scheme contact Mike Innes.