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The Chancellor has announced that the 5% reduced rate of VAT will temporarily apply to certain services provided by the hospitality sector, from next Wednesday 15 July 2020 until 12 January 2021. The change is understood to apply to hotels and B&Bs, restaurants, takeaways, cafes, cinemas and visitor attractions. Alcoholic drinks are excluded from the measure.
The fact that the announcement has been presented as such a significant boost to the hospitality sector highlights the fact that the hospitality sector is price sensitive, so a reduction from 20% to 5% will obviously make headlines and is a welcome announcement.
However, the change also highlights the fact that by normally applying the standard 20% VAT rate to the hospitality sector, the UK has for a long time been out of line with the rest of Europe.
There will no doubt be those who think that membership of the EU has prevented the UK from applying a reduced VAT rate to hospitality. This is not the case, of course. On the contrary, most countries in the EU have already been applying reduced VAT rates to their hospitality sector for years.
In fact, the UK is the only European country other than Denmark not to have already applied a reduced rate of VAT to any of the hospitality services to which the new measure will apply.
For example, although the reduced VAT rate applied to hotel accommodation by EU countries varies, 10% is the norm in most countries (e.g. France, Italy, Spain) with Germany normally applying 7%, although Germany has already lowered the reduced VAT rate from 7% to 5% until 31 December 2020 alongside the reduction in the German standard VAT rate from 19% to 16%.
It is also the norm for restaurant and café services to benefit from reduced VAT rates across the EU, again typically 10% or lower.
Because of this, the British Hospitality Association and others have been lobbying the Government to reduce the VAT rate on hotel accommodation and other hospitality services for some time now.
Evidence suggests that reduced VAT rates produce a significant stimulus to the hospitality sector in those countries in which they apply.
Perhaps it is time therefore for the change to be permanent, not temporary. Even if the Government considers 5% to be too low a rate to be applied permanently, there is nothing preventing them introducing another reduced rate, such as the 10% rates seen across the EU.
Of course, by the time this temporary measure comes to an end in January 2021, unless there are unexpected developments, there should be nothing to prevent the UK Government from making any changes they want to UK VAT rules, as the Brexit transitional arrangements come to an end on 31 December 2020.
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