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Last updated: 31 Aug 2021
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Temporarily reduced VAT rate ending 30 September 2021 - are you ready?

It seems a long time ago when the reduced rate of 5% was introduced (15 July 2020), to support the hospitality and tourism sectors; but all good things must come to an end, and the first change comes on 1 October 2021, when the rate will increase from 5% to 12.5%.

As businesses slowly start to see a return to normal trading activity, some of the support introduced by the Chancellor during the pandemic is coming to an end, and businesses will need to take action to prepare. 

Many of the changes outlined below should be considered both in preparation for the rate increase from 5% to 12.5%, and again when the 12.5% rate ends, and the 20% standard rate returns on 1 April 2022. In the meantime, businesses should focus on preparing for 1 October and taking steps to ensure VAT is accounted for correctly, thus reducing the risk of errors and potential penalties.

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Socrates Socratous

+44 (0)20 8037 3113
socratouss@buzzacott.co.uk
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As businesses slowly start to see a return to normal trading activity, some of the support introduced by the Chancellor during the pandemic is coming to an end, and businesses will need to take action to prepare. 

Many of the changes outlined below should be considered both in preparation for the rate increase from 5% to 12.5%, and again when the 12.5% rate ends, and the 20% standard rate returns on 1 April 2022. In the meantime, businesses should focus on preparing for 1 October and taking steps to ensure VAT is accounted for correctly, thus reducing the risk of errors and potential penalties.

Accounting for VAT - right rate at the right time

Accounting for VAT - right rate at the right time

Any tickets for admission sold before 1 October 2021 for events that will take place after that date will be subject to VAT at the 5% reduced rate. This is an important point, and in our experience is often overlooked, with VAT being frequently accounted for incorrectly using the date of admission. 

Similarly, deposits or payments received prior to 1 October 2021 for catering or accommodation to be provided after 30 September 2021 will benefit from the rate of VAT applicable on the date when the payment is received. Normal tax point rules apply, usually based on the invoice or payment date, whichever comes first. If the policy of the business is to pass on the benefit of the reduced rate to customers, making them aware of the potential for lower fees might encourage sales and therefore improve cash flow for the business. Customers will also be grateful for the opportunity to benefit from lower costs. For example, many individuals have had to rearrange weddings to dates after 31 March 2022. Those who pay for the catering element in advance can benefit from the lower VAT rate. Pay before 1 October 2021 and the 5% applies, pay between 1 October 2021 and before 1 April 2022, then the 12.5% applies.

Practical points

Practical points

There are a number of practical issues to consider when the rate changes and some of the key questions for any business are summarised below.

  • Will the business keep prices at current levels, or increase prices to reflect the higher VAT rate?
  • Have the VAT rates in till systems and price lists been amended to reflect the changes?
  • If third party contractors are used, for example to provide catering services, have they amended records to reflect the correct VAT rate?
  • Have VAT invoices or receipts been changed to reflect the correct VAT rate?
  • If the business sells vouchers, have you made the necessary accounting changes so that VAT is accounted for at the correct time and the correct VAT liability applied?
  • Where VAT is accounted for outside of a till system, have records been amended to reflect the correct VAT fraction?
  • Do the terms and conditions of sale  need to be changed – do they refer to a fixed VAT rate or just the addition of VAT?
  • If using template contracts do these need to be updated, as well as information on the business website?
  • Have you reviewed purchase order documents/systems that may need to be updated?
  • Have you updated any template spreadsheets for VAT return calculations to reflect the new rate?

Each business will need to consider its own specific circumstances but getting it wrong can be costly. As the VAT rate is being increased in the absence of price increases there will be reduced revenue for the business. Taking time to consider the impact of the changes is therefore time well spent.

Speak to an expert
Speak to an expert

For more information, please contact our VAT Consultancy Partner, Socrates Socratous on socratouss@buzzacott.co.uk, or your regular VAT team adviser.

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