VAT, or value-added tax, is a tax that must be paid when goods or services are purchased. When a customer sees a price for a product in a store, VAT has already been factored in it. In the United Kingdom, the standard rate of VAT is 20%, and nearly half of all things purchased by consumers are subject to this rate. However, during the pandemic, a 5% reduction in the rate applies to specific items such as children’s car seats, home energy and sanitary items.
Temporary VATE Rate Cut
On January 4, 2011, the usual rate of VAT raised from 17.5 per cent to 20 per cent. After some time, the government reduced the VAT rate to 15% for a limited time in 2008. The goal of the cut was to increase consumer spending by encouraging retailers to pass the savings on to their customers.
COVID-19 Temporary VAT Rate Cut
On July 8, 2020, the government stated that certain supplies related to hospitality, hotel & vacation lodging, and admission to specified attractions would be subject to a temporary 5% reduced VAT rate. The lower rate was initially intended to be temporary, lasting from July 15, 2020, to January 12, 2021.
However, the deadline was then extended to March 31, 2021. In addition, the government declared in Budget 2021 that the temporarily reduced rate of 5% would be extended for another six months until September 30, 2021.
The objective of the Projected COVID-19 VAT Policy
With the release of the COVID-19 lockdown, the government has temporarily applied a reduced VAT rate (5%) to specific supplies in the tourism and hospitality industries to boost businesses and protect 2.4 million jobs. The goal was to support the re-opening of the economy, which had been shut down due to the coronavirus pandemic.
The government announced the temporary VAT rate cut to cope with the pandemic situation globally. However, the temporary 5% reduced rate will end on September 30, 2021, and will be replaced with a 12.5% reduced rate.
The Background of Policy Implementation
The emergency relief or cut was introduced as a quick response to the coronavirus outbreak. Also, the main goal was to assist businesses that had been significantly impacted by the coronavirus epidemic and social distancing measures.
Before the current lower rate, all supplies of restaurant services, hot takeaway meals, holiday accommodation, and entrance to many attractions were subject to the usual rate of VAT (20%). Consequently, the measure is applied to provide continued support to the most severely impacted businesses during the pandemic.
Temporary VAT Rate Cut Proposal Details
Operative Date and Laws
The initial reduced rate of 5% applied on July 15 2020, and the subsequent 12.5% standard reduced rate will again implement from October 1 2021. Previously, most goods and services provided by the tourism and hospitality industries were subject to the regular rate of VAT. However, as soon as the temporarily reduced rate came into force, the three sectors were targeted to obtain the reduced rate of 5%, including hospitality, accommodation, and attractions.
- Hospitality
On the premises, supplies are catering, including hot & cold food materials and consumed drink ingredients. On the other hand, off the premises, supplies cover hot takeaway food and drink materials.
- Accommodation
The facility of a hotel, holiday accommodation, pitch fees for caravan parks, rented tents, and related facilities are included in this sector.
- Attractions
Attractions cover the cultural exemption, such as the range of supplies of food sold in the UK and various cold takeaway food. It also applies a zero rate to a limited number of drinks but expressly excludes alcoholic beverages. Furthermore, attractions also cover admission charges of museums, galleries, art exhibitions, zoos, theatrical, musical, choreographic performances of a cultural nature when supplied by a public body or an eligible body.
Influences of the Temporary VAT Rate Cut
- Economical Influences
The temporary VAT rate cut will help hotel, hospitality, and tourism firms improve cash flow and viability. As a result, COVID-19 encourages firms to spend more in these areas and thrive economically. However, in a pandemic, the reduced or slashed rate may have a modest negative impact on inflation.
- Individual and Family Influences
Individuals who go out to eat, buy hot takeaway food, stay in hotels or other sorts of holiday accommodation, or visit different types of attractions are expected to benefit from the temporary VAT rate reduction.
The temporary lower rate of 5% will be extended for another six months until September 30, 2021. To avoid a cliff edge at the end of the 5% period, it introduces a temporarily reduced rate of 12.5 per cent until March 31, 2022.
The temporary lower rate of 12.5 per cent was extended and adopted to help businesses maintain their cash flow and viability following numerous periods of closure during the coronavirus outbreak. Because of the positive nature of this metric, the customer experience is predicted to increase. On the other hand, this measure is unlikely to influence the family formation, stability, or breakdown.
- Equality Influences
The anticipated temporary VAT reduced rate will not have equal influence on all groups with common characteristics. Corporations, SMEs, and individuals, everyone will acquire different benefits.
- Civil society and Business Influences
By significantly lowering the VAT, the rate reductions are likely to have a favourable and considerable impact on more than 100,000 firms. The temporary 12.5 per cent reduced rate is expected to impact system providers, as they will incur a one-time expense to familiarise themselves with the required modification and implement software adjustments that allow firms to account for VAT at the new rate.
On the other hand, HMRC is contacting industry stakeholders to acquire further evidence on implementation costs, and the government will update its estimates as soon as possible. Hence, because of this initiative’s helpful and cheerful nature, the customer experience for impacted businesses is projected to improve. The civil society organisations, on the other hand, will be unaffected.
- HMRC Operational Influence
HMRC’s operational costs for the implication of temporary VAT are estimated to be negligible. The reduced rate will be monitored using tax returns and revenues data and communication with affected taxpayer groups.
Reason to Introduced Temporary VAT Rate Cut
Lockdown conditions forcefully slowed down the global and national business growth during the spread of COVID-19. Unfortunately, this meant severe disruption for firms that rely on social contacts, such as the property and hospitality industries. The government has implemented a range of initiatives as part of the COVID-19 economic recovery plan to assist their rehabilitation. A temporary VAT rate cut is one of the government initiatives to support both businesses and individuals.
Impacts on VAT Flat Rate Scheme
The government’s planned temporary VAT rate reduction will impact the VAT Flat Rate Scheme (FRS). Some FRS rates will change because of the quick changes, allowing VAT FRS users to benefit from the temporary drop in the standard VAT rate.
Conclusion
The VAT cut affects VAT registered businesses in certain sectors and their customers. Organisations that make supplies of hospitality, hotel, holiday accommodation, admission to certain attractions, and their advisers can enjoy the benefits of the temporary VAT reduced rate in the COVID-19 situation. A temporary VAT cut has the advantage of being a “shovel-ready” measure that can be implemented fast. It can give the economy a short-term boost by providing individuals more money to spend and encouraging consumers to move purchases forward to take advantage of cheaper pricing for a limited time.
VAT Consultancy for Complex Taxes
Businesses must comply with all legal and formal requirements, such as invoicing, paperwork requirements, and declaration duties, to prevent any risk in the area of Value Added Tax. On the other hand, possibilities and optimisations must be realised early to execute all business activities and instances better.
VAT consulting services assist firms in complying with a variety of complex taxes. Consultants with an in-depth understanding of complicated taxes use a proactive strategy based on proven experience to lower VAT and customs charge costs.
Bloom Financials provides long-term, cross-industry, and practical VAT guidance with a pragmatic approach, focusing on specific industrial sectors. Staffed by VAT specialists, It serves businesses and entrepreneurs from all industries and sizes.
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