With all of the hullabaloo over Boris’s National Insurance levy, many of you may have missed the announcement of changes in VAT rates, with most sales by the hospitality industry set to carry 12.5% VAT from 1st October 2021. Which beggars the question: can your bookkeeping system cope with four different VAT rates?
This change, announced by Rishi Sunak in July, came out when the country’s main obsession was with holiday destinations and which colour category they were in; red, amber or green? The move to 4 rates of VAT last happened in 1979 and will hopefully not happen again after March 31st next year, when the temporary 12.5% rate for most sales made by the hospitality industry will revert to the standard 20% rate.
New 12.5% VAT Rate: What is affected?
In a nutshell, the supplies made by the hospitality industry that have been subject to 5% VAT since July 2020 will become liable to 12.5% VAT for the period from 1st October 2021 to 31st March 2022. For most hospitality suppliers, it will just be a case of just changing the VAT code from 5% to 12.5% on their software – job done you would think.
However, due to a quirk of the rules, if a business raises an invoice or receives a payment received before 1st October, these sales will be subject to the rate in force on the invoice or payment date, rather than when the goods or services are subsequently consumed. A bonus to some, a pain in the proverbial to others, especially if their accounting software throws a wobbly!
There is an easy VAT fraction of 1/9 with the 12.5% rate. So, for example, if you pay £90 including VAT for a night’s accommodation in a hotel, and the hotelier has not itemised the VAT as a separate figure, you know that your potential input tax claim is £10.
New 12.5% VAT Rate: Credit notes
If you raise a sales invoice or receive an advance payment at the 5% rate of VAT before 1st October and then it is adjusted after this date, perhaps because of an order cancellation or price adjustment, the VAT rate for the credit note will be based on the rate originally charged.
New 12.5% VAT Rate: Flat rate scheme (FRS)
From 1st October, the FRS rates will increase for the following three categories:
- Catering services including restaurants and takeaways: 4.5% will increase to 8.5%
- Hotel or accommodation: 0% will increase to 5.5%
- Pubs: 1% will increase to 4%
There will be a further challenge for businesses whose VAT return quarter does not coincide with the ending of then 5% rate on 30th September, therefore there will be two FRS rates for VAT returns ending at the end of October or November. So, for example, a restaurant completing a VAT return for the three months to 31st October, which uses the FRS will account for 4.5% VAT on its August and September gross takings and 8.5% for receipts in October.
New 12.5% VAT Rate: Will you need to change your accounts system?
The 12.5% rate should be easy to deal with if accounting systems are flexible. With the UK now able to make more VAT changes post-Brexit, no longer having to comply with EU law, there might be additional temporary VAT rate movements in other sectors in the years ahead.
It is worth checking that VAT rates can be easily adjusted before you change your accounting system. To quote VAT Notice 700, section 30, “When a VAT rate or liability is changed, it may have to be introduced at short notice. HMRC recommends that your accounting system – whether or not you use a computer – is designed to allow you to adjust to the change without difficulty.”
Tax Accountant’s View
It was only to be expected that Rishi’s olive branch to the hard-hit hospitality sector would be gradually wound down; so, I’m afraid that anyone who has bought one of those super-cheap budget accounting systems, will now have to chuck it in the bin in place of one that can actually do the job.