Do recent VAT reductions mean more work for you and your accountant?
Last month, as part of the Treasury’s COVID-19 economic recovery response, Rishi Sunak announced a reduction in VAT for hospitality and entertainment industries from 20% to just 5%. The changes came into effect on 15 July and apply to supplies of food, accommodation and admissions to attractions. The government has published its full list of the supplies affected here.
The VAT cut will run until 12 January and according to the Treasury will help 150,000 businesses and protect up to 2.4m jobs. The reduced rate doesn’t have to be passed on to customers, but some companies are choosing to advertise this to attract them. The leisure and tourism sector has been particularly hard hit by the crisis, so the government has left it up to individual businesses to decide the extent to which they can afford to pass the saving on – hopefully increasing spending and boosting the economy.
We go through why the cuts were made and the challenges affected businesses may face in applying them.
By now most people realise that the shock of the pandemic will be felt for some time to come. The Bank of England’s central forecast, released last week, shows GDP regaining pre-crisis level by the end of next year. In general it’s less negative than the May Report as many restrictions have been eased sooner than anticipated, but shows we still have some challenges to come.
The relatively positive change is down to increased consumer spending over the past two months as lockdown measures began to ease, but it hasn’t been seen across all sectors. The VAT reduction applies to many businesses across tourism and leisure industries, and can be seen as a specific measure to boost spending in these areas. We can hope that businesses will see an increase in local tourism and a healthy uptick in trade.
With the UK’s GDP dropping the hardest of all G7 countries and lockdown shrinking GDP by 21% in the second quarter, any measures to encourage spending is welcome, especially to the many affected small businesses. In fact, when the measures were announced on 8 July, just 21% of adults in the UK felt comfortable with the idea of eating indoors at a restaurant. August has seen that level creep up to nearly 4 in 10 adults – a 34% increase since the end of last month. Cutting VAT to 5% is a way of supporting some of the hardest hit, public-facing businesses, as well as potentially incentivising the public to return to restaurants.
In short, it depends on what software you use to do your accounting. Lots of bookkeeping software has cloud versions that will automatically adjust the changes in VAT for you. However, if you don’t have a specific tool that does this then it’s likely that you may find the reduced rate of VAT more complex to administer, especially as it isn’t a blanket reduction. It’s the kind of task few would welcome, and will require a bit of initial labour from whoever runs your accounts.
If your accounting systems are inflexible or outdated then this may prove quite the headache and could require a number of manual adjustments to resolve issues. This will obviously require time and people to settle, which could end up costing you more than you want to spend in the short-term. However, the size of the subsidy is generous enough that the extra admin costs shouldn’t exceed the benefit of claiming it.
The government has been promoting its Making Tax Digital (MTD) initiative, introduced in April 2019, and this change in VAT might be a great time to make the switch to a more robust and simple digital bookkeeping software. At a time when under-claiming or over-claiming on VAT could cost small businesses a lot through later payments with applied interest and penalties, it’s in every business owner’s interest to modernise existing accounting systems.
In the last financial year, VAT generated £135.6bn for the Treasury, and is the second largest tax contributor after income tax. HMRC’s MTD initiative was introduced to address the estimated £12.5bn of missed VAT annually. In its first year, MTD generated over £223m in extra tax revenue.
The current VAT reduction is potentially a great opportunity to increase the efficiency of your business, allowing you to standardise processes, reduce errors and track your outgoings more effectively. From April 2022, the initiative will be extended to any VAT registered business with a turnover below the existing VAT threshold too. It’s unlikely to be paused, so if you’re not digital yet then it’s a good time to explore your accounting package options such as Xero, Quickbooks and Sage to name a few.
If your business is run on a subscription service where your customers have set up standing orders, then the VAT reduction may require more complicated work on your end. The customer will need to alter the standing order themselves for the period that VAT is reduced. This will require reaching out to every subscription holder and arranging it with them.
If this does affect you then it may be sensible to consider switching to direct debit payments instead. There are a number of platforms that offer Cloud Direct Debit solutions to help you collect payments on subscription products without relying on personal standing orders from your customers. If you’re interested in exploring this option, companies such as SmartDebit and GoCardless, amongst many more, are worth a look at.
The Eat Out to Help Out scheme is a government scheme that offers diners 50% of their meal at a participating restaurant, up to £10. It’s only applicable on food or non-alcoholic drinks to eat in. It’s valid from Monday to Wednesday and is a way to incentivise the public to dine out again.
Things get a little complicated when you also take into account the current VAT reduction. HMRC announced that businesses who’ve signed up to the scheme will still have to pay full VAT on the subsidised amount. The subsidy before VAT on a meal that uses the full £10 amount works out at £8.83 rather than £9.52. However, given that 5% is spread across the whole bill (excluding alcohol), it’s still a strong subsidy, but will require a little extra time to implement.
If you’re a small business in the leisure and tourism industries and you use the Flat Rate Scheme then you’ll also enjoy the current VAT reductions. For businesses in the catering industry, VAT is dropping from 12.5% to 4.5% for catering, and hotels and accommodation providers will enjoy a reduction from 10.5% to 0%. The government has posted more detailed information if this applies to you.
VAT rates have been reduced to help stimulate the economy by encouraging consumer spending in some of the hardest hit industries. Given the significant size of the reduction, you’ll want to make sure you’re able to enjoy the benefits of this subsidy without spending too much time or money altering VAT manually across your supplies.
If your business is part of one of the sectors enjoying VAT reductions then this is a great time to assess your accounting systems to make sure you’re getting the most out of them.
We’ve collated more information and advice to help you navigate the changes and updates to business support on our COVID-19 Impact Support Hub.