21 Sep 2020

UPDATE: How pubs and restaurants should be dealing with the Temporary Reduction in VAT

The Temporary Reduction in VAT

“HMRC has very recently provided further guidance on some FAQ’s. See attachment. Gin drinkers in particular may be disappointed to see HMRC’s view that if a tonic is “served” with a gin both the gin and the tonic are subject to 20% VAT. There is, however, helpful clarification on promotions such as "Buy a burger and get a free pint" ; plus on other matters such as advance payments for accommodation bookings taken now for occupation after 12 January 2021.

The temporary reduction in VAT for “hospitality” is a welcome move, but beware of the details.

The changes in the VAT rate designed to help hospitality businesses should prove an incentive for customers to spend, whilst helping businesses through a very difficult time as we emerge from the most stringent lockdown measures. However, as with all Government incentive schemes, the devil is in the detail and incorrect implementation could lead to increased fees to put the errors right or where errors are not corrected, penalties and interest levied by HMRC. Here are our top tips for getting it right:

  • Not a new requirement, but make sure that your daily gross takings are correctly recorded. Takings should be recorded daily and included on the correct VAT return.
  • If you are signed up for the Eat Out to Help Out scheme, make sure you understand the rules of the Scheme. Remember that VAT is due on the full bill, including the subsidy paid by the Government.
  • Instead of all wet and dry sales being subject to VAT (we don’t cover accommodation or room hire in this note) some, but probably not all, of your sales may qualify for the reduced rate of VAT between 15 July 2020 and January 12th next year. The important distinction here is that alcoholic drinks are still liable to 20% VAT.
  • The default expectation is that multi-button tills will be used to record sales at the 20% rate separately from those liable to the 5% rate of VAT. Tills may need reprogramming and staff will need training on correctly inputting the sales to ensure the correct rate of VAT is applied. For example, where food, soft drinks and alcohol are included in the same order the alcohol is still subject to VAT at 20% with the rest of the order qualifying for the lower, 5% rate of VAT.
  • The well trailed promotions in the media, for example buy a meal for £10 and get a free pint, come with their own health warnings as for VAT purposes, the pint isn’t free. The £10 needs to be apportioned between the meal (5% VAT) and the pint (20% VAT). Again, staff training and till reprogramming may be needed here.
  • And there’s what I’m calling the “gin and tonic conundrum.” In principle, if a customer orders a glass of gin, and separately orders a bottle of tonic, the tonic could be liable to 5% VAT. Since the new rules were introduced in a hurry, it is unclear whether to get the 5% rate on the tonic HMRC will require the customer to mix the gin and tonic themselves. In any case, busy bar staff need a workable system, and it may be simpler to just ring through the gin and tonic on the 20% VAT till button rather than try and split it.
  • If you are able to justify to HMRC that you cannot use your tills to correctly record sales at the different rates of VAT, you may be able to use a special “retail scheme.” All schemes still require you to accurately record your takings on a daily basis and the details are outside the scope of this note, but if you have this issue please get in touch.
  • Some takeaway businesses may already be using either multi-button tills or a retail scheme if they sell cold, takeaway food qualifying for the zero-rate. However, given that certain cold takeaway food remains standard-rated, (e.g. most soft drinks or confectionery) these may potentially now have to deal with 3 rates of VAT (zero, 5% and 20%) and will need to consider what adaptations are necessary, e.g. if their till systems cannot deal with more than two rates of VAT.

We are here to help you navigate these new rules so please do not hesitate to get in touch if you need assistance or advice – I’m off for a gin but without the tonic!