The temporary reduced rate of VAT (5%), introduced to assist qualifying hospitality trades disrupted by COVID lockdown measures, was increased to 12.5% from 1 October 2021. Based on present information, from 31 March 2022, this 12.5% rate will revert to the 20% standard rate.
This reduction in VAT applied to the sales of hospitality trades will have allowed VAT registered traders to retain more of their turnover subject to VAT if no change was made to their selling prices.
If no change in selling prices
For example, for every £10,000 of income received and subject to VAT at 20%, hospitality traders would retain £8,333.
During the period up to 30 September 2021, when the rate of VAT on hospitality trades was reduced to 5%, for every £10,000 of income received hospitality traders would retain £9,524.
Since 1 October 2021, for every £10,000 of income received including VAT at the 12.5% rate that now applies, for every £10,000 of income received hospitality traders will retain £8,889.
And from 31 March 2022, its back to square one. Turnover will revert to a 20% VAT charge.
If traders have passed on VAT reductions to customers
If traders have decided that it was more beneficial to pass on VAT savings to their customers the reduction in VAT would have allowed them to drop their prices as follows – all figures based on a selling price of £100 before VAT was added:
- Selling price at 20% VAT – £120
- Selling price at 5% VAT – £105
- Selling price at 12.5% VAT – £112.50
And, of course, traders can pass on some of the VAT reductions to customers and retain the difference.
What is clear, is that this support for the hospitality industry is being phased out. Much now will depend on how effective government is in keeping the downside disruption of COVID to a minimum. Otherwise, the Chancellor may have to dig-deep to find other ways to support this significant industry sector.
As turnover from 1 October is subject to a 12.5% rate of VAT, affected traders will need to add a 12.5% rate to their accounting software and use this new rate for the period 1 October 2021 to 31 March 2022. The 12.5% is a new rate of VAT and accordingly will not be included as a choice in most accounts software.
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