VAT Rate Increase from 1 October 2021

24/09/2021 - 4 minutes read

VAT rate increase from 1 October 2021 applies to hospitality businesses and the VAT rate is schedule to increase from 5% to 12.5%.

The rate was reduced to 5% on 15 July 2020 as part of the government’s package of measures to help businesses during the COVID-19 pandemic. Finance Act 2021 includes clauses to increase the rate to 12.5% between 1 October 2021 and 31 March 2022, with the standard rate of 20% due to return from 1 April 2022.

VAT Rate Increase from 1 October 2021

VAT Rate Increase from 1 October 2021

The temporary VAT rates and dates

VAT temporarily reduced from 20% to 5% for eligible businesses15th July 2020
Temporary VAT rate of 5% ends30th September 2021
Temporary VAT rate of 12.5% begins1st October 2021
Temporary VAT rate cut ends31st March 2022

The reduced VAT rate of 5%, soon to increase to 12.5% applies to supplies of:

  • – Admissions to attractions that are not already eligible for the cultural VAT exemption including:
  • – Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities.
  • – Hot takeaway food and hot takeaway non-alcoholic beverages.
  • – Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs.
    • – Theatres
    • – Circuses and fairs
    • – Amusement parks
    • – Concerts
    • – Museums and exhibitions
    • – Zoos
    • – Cinemas
  • – It does not apply to sporting events, or to alcoholic drinks which continue to be standard rated at 20%.

The new VAT rate

If you calculate the amount of VAT due to HMRC from the cash received,  from 1 October 2021, there will be a new VAT fraction. To calculate 12.5% VAT when using cash receipts, you should use 1/9. For example, if a customer books a holiday on 1 November 2021 and pays £126, the output tax due to HMRC is £126 x 1/9 = £14.

DateVAT RateVAT Fraction
15 July 2020 to 30 September 20215%1//21
1 October 2021 to 31 March 202212.5%1/9
1 April 2022 onwards20%1/6

Flat Rate Scheme

Those of you who use the flat rate scheme, the current temporary rate will also change on 1 October 2021. The changes to the flat rate scheme percentages for affected sectors are:

IndustryBefore 15 July 202015 July 2020 to 30 September 20211 October 2021 to 31 March 2022
Catering services, including restaurants and takeaways5%12.5%8.5%
Hotel or accommodation1.5%0%5.5%
Pubs6.5%1%4%

Can you rejoin the flat rate scheme?

Some businesses left the flat rate scheme last year due to potential increased VAT payments and depending upon their current sales mix, they might want to rejoin the flat rate scheme either on 1 October 2021 or on 1 April 2022 if it’s likely to be tax-efficient again to be on the flat rate scheme.

You can rejoin the flat rate scheme at any time provided you have been out of the flat rate scheme for at least 12 months.

Credit notes

If you raise a sales invoice or receive an advance payment at the 5% rate of VAT before 1 October 2021, 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. This is helpfully confirmed by HMRC’s guidance: VAT Notice 700, para 18.2.5.

Deposits

If deposits are received in advance of a supply, output tax will be calculated on the VAT rate in place at the time the deposit is received.

For example, on 1 June 2021, a customer books a hotel room for 1 April 2022 and pays a deposit of £100 at the time of booking. The output tax due to HMRC on the VAT return for this period is £4.76 (£100 x 1/21).

On 1 October 2021, the customer pays a further deposit of £100. The output tax due to HMRC on the VAT return for this period is £11.10 (£100 x 1/9).

How can MCL Accountants help?

Contact MCL Accountants on 01702 593 029 if you have any queries on the increase in the VAT rate for hospitality businesses or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.

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