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There has been broad coverage of the fact that the Chancellor has extended, until 30 September 2021, the period during which the 5% reduced-rate of VAT will apply to the hospitality sector.
The extension to the existing measure, which applies to businesses such as pubs, restaurants, takeaways, cafes, hotels and cinemas, but does not apply to the sale of alcohol, has generally been welcomed, and there will also be a further ‘transitional’ period, between 1 October 2021 and 31 March 2022, during which a new 12.5% reduced-rate of VAT will be applied before the 20% standard-rate returns on 1 April 2022.
However, as I wrote when the temporary 5% reduced-rate was introduced last year, there is an opportunity (now seemingly missed by the Chancellor) to set the UK’s hospitality sector VAT rate at a level that is more in line with our European neighbours and give the sector a much needed boost not just now, but for the future as it tries to recover from the devastation it has encountered this last 12 months.
The fact is that in applying the 20% standard-rate of VAT to our hospitality sector, the UK has for a long time been out of line with the rest of Europe, where most countries have long been applying reduced VAT rates to hospitality services.
In fact, before Covid, the UK was the only European country other than Denmark not to have already applied a reduced-rate of VAT to any of its hospitality services.
It is the norm for restaurant, café and hotel services to benefit from reduced VAT rates across Europe, typically 10% or lower, and many EU countries have also lowered their reduced VAT rates even further during Covid, with Germany even reducing its standard-rate of VAT from 19% to 16%.
Studies have suggested that reduced VAT rates produce a significant stimulus to the hospitality sector in those countries in which they have been introduced, and the UK hospitality sector is likely to be in need of a significant stimulus much further into the future than next April, let alone this October.
Another point that appears to have been missed by many commentators is that now we have left the EU, 5% is no longer the lowest VAT rate that can be applied. One of the few benefits that Brexit actually does deliver is the ability to be more flexible with our VAT rates. This would therefore have been a perfect opportunity for the Chancellor to introduce a temporary VAT zero-rate for the hospitality sector, which would have provided a more significant stimulus when needed most and also showed that there are at least some tangible benefits to Brexit.
I suggested last year that even if the Government considers 0% or 5% to be too low a rate to be applied permanently, there is nothing preventing them introducing a different long-term reduced-rate, such as the 12.5% rate they are temporarily introducing.
The hospitality sector has demonstrated how innovative and brave it can be in the face of the most stringent of measures this last 12 months, but this government has shown that they are neither of these when it comes to VAT policy.
If you would like to discuss how VAT affects your hospitality business please contact Keith Miller, our VAT Director, or your usual ETC Tax contact.
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