VAT rate change for hospitality and tourism sector

UPDATED 29 March 2021

Updates to this scheme

This scheme has been extended to 30 September 2021.

An interim rate of 12.5% will be introduced for a further 6 months after this, with the standard 20% VAT rate will apply from April 2022.

We will update this article when more details are available.

About the scheme

The UK VAT rate on hospitality, holiday accommodation and attractions is reducing from 20% to 5%.

The cut applies to food and non-alcoholic drinks as well as accommodation and admission to attractions across the UK.

This means that some transactions that you would normally record at 20% VAT may now be at a reduced rate of 5% VAT.

There is already a 5% VAT rate in Sage Accounting Start called Lower Rate, and in most cases you just need to change affected transactions from Standard to Lower Rate.

For detailed information about what's included, see the government support page:

https://www.gov.uk/guidance/vat-reduced-rate-for-hospitality-holiday-accommodation-and-attractions

If you are still unsure whether your transactions should be at the reduced rate, you need to check with your accountant or HMRC.

 

What do I need to check?

This table summarises the different areas you might need to update in Accounting. If you think an area applies to your business, click the area to get more information.

Area Why is this area affected? When do I need to make changes?
Categories

Categories default to the Standard VAT rate. If you have categories that relate to hospitality, holiday accommodation and attractions, you may want to change them to the Lower VAT rate.

If you don't, you will have to ensure you manually select the correct vat rate when entering transactions.

You may want to create new categories specifically for Lower Rate transactions and keep existing categories for Standard Rate transactions.

You can create new categories with Lower Rate VAT now but should only use categories set to the reduced rate for transactions dated from 15 July.

Recurring invoices

The VAT rate on recurring invoices is based on when the invoice was originally created.

If you have recurring invoices that relate to hospitality, holiday accommodation and attractions, you may want to change them to the Lower VAT rate.

If you don't, the VAT amounts on your recurring invoices that are generated after the rate change may be incorrect.

After the last recurrence on the old VAT rate and before the first recurrence at the new rate.
Recurring payments and receipts

The VAT rate on recurring payments and receipts is based on when the payment or receipt was originally created.

If you have recurring payments or receipts that relate to hospitality, holiday accommodation and attractions, you may want to stop them and recreate them at the lower rate.

If you don't, the VAT amounts on your recurring payments and receipts that are generated after the rate change may be incorrect.

Before the first recurrence at the new rate.
Bank feeds and bank statement imports

VAT rates are applied based on previous instances of transactions.

If you have bank feeds or bank statement imports that relate to hospitality, holiday accommodation and attractions, you will need to update your transactions or bank rules to the reduced rate.

The first time you import transactions from a bank feed or bank statement after 15 July.
Converting quotes, proformas, drafts and estimates to invoices

VAT rates are not automatically recalculated when you convert quotes, proformas, drafts and estimates to invoices.

If you have set up quotes, proformas, drafts and estimates that relate to hospitality, holiday accommodation and attractions, you may need to change the VAT rate before you convert them to an invoice.

This can be done at any time if you know the invoice will not be created before 15 July.
Crediting invoices

When you credit invoices, you should use the same rate of VAT applied to the original invoice.

This is true even if the original invoice relates to hospitality, holiday accommodation and attractions and the rate has subsequently reduced.

You don't need to make any changes.
Copying quotes, estimates, invoices and credit notes

If you copy existing transactions that relate to hospitality, holiday accommodation and attractions, the VAT rate may need to be amended.

VAT rates are copied at the rate applied to the original transaction.

This should be done when you are creating the copied transaction.
VAT Cash Accounting

Even if you use VAT Cash Accounting, VAT is still calculated when you create an invoice. The difference is that VAT for the invoice only becomes payable when you record a payment.

You need to consider the VAT rate being applied on invoices in the same way as businesses that use Standard VAT.

Refer to the other areas.
Flat Rate VAT If you use Flate Rate VAT, the percentages you apply may change part-way through the VAT period. When you calculate VAT payments after the rate change.
Future-dated transactions

If you have created transactions relating to hospitality, holiday accommodation and attractions that are dated after 15 July, the VAT rate may have been calculated at the wrong rate.

 

If the transaction is correctly dated, you can amend it at any time.

Categories

Each category holds a default VAT rate to save you from having to select the correct rate each time you use it. You'll need to consider whether to change this to the Lower VAT rate for some of your categories.

If you're using the default chart of accounts (which we set up for you when you started using Accounting), your categories are set to use the Standard VAT rate by default.

How does this work?

When entering transactions such as sales and purchase invoices, the VAT rate entered by default is based on the categories selected.

If you use products and services, the VAT rate set in products and services overrides the VAT rate set in the categories.

What do I need to do?

This may affect you if you have categories that relate to hospitality, holiday accommodation and attractions and now have some items that are charged at the lower rate.

If you're a hotel business, for example, all your room rates and food will be charged at the Lower rate , but alcoholic drinks and other sundry items such as dry cleaning are charged at the Standard rate.

Alternatively when recording purchases related to the hospitality industry, such as hotel or restaurant expenses, you may now need to record different VAT rates for different items.

Depending how you record your transactions, you may want to consider the following options:

  • Do nothing - simply change to the Lower VAT rate when entering transactions. You or your staff will need to remember to select correct VAT rate every time, so this may be prone to errors.
  • Change the VAT rate on some of your categories to ensure the lower rate is selected by default.

    This will make sure the correct VAT rate is selected when entering transactions and will help reduce errors.

    For example, as a hotel business, you might record all your room sales to a single Room Rates category. Changing the VAT rate on the category will make sure lower rate is charged when the Room Rate ledger account is selected.

  • Create new categories to record transactions at the lower rate.

    This will make sure the correct VAT rate is selected when entering transactions, help reduce errors, and help track your sales or purchases made at the lower rate.

    For example, all your expenses are recorded against the General Expenses category and this account is set to use the Standard VAT rate. Create a new General Expenses- Lower rate category and set to use the Lower Rate. Use it to record and track lower rate expenses such as meals and hotel rooms.

  • Create product or service records for items that you buy or sell regularly, and set the correct VAT rate on each one. This overrides the default VAT rate set on the category.

When to make these changes

The change to the VAT rate comes into effect on 15 July 2020.

Make these changes once you start processing new transactions dated from 15 July onwards. You can create new categories at any time, but don't use them until 15 July.

How to change a category

Find out what VAT rates are set on my categories

The VAT rate set on each category is shown on the Chart of Accounts list.

Before you start, we recommend that you export your chart of accounts list so you have a record of the VAT rates set on the accounts before you make any changes. This will also help you revert to the original VAT rates when the scheme ends in March.

  1. Select Settings, then Chart of Accounts.
  2. From the New Ledger Account, New Category drop-down, select Export Accounts.
  3. Once exported. download the file from the file icon.

Change the VAT rate on a category

  1. Select Settings, then Chart of Accounts.
  2. Use the search to find the category to change.
  3. Select the required category.
  4. Choose Lower Rate from the VAT Rate drop-down.

Recurring invoices

If you have recurring invoices that relate to hospitality, holiday accommodation and attractions, you need to edit them after the last recurrence at the old VAT rate, and before the first recurrence after the rate change.

For example in this weekly invoice that posts every Monday, change the rate after posting the invoice on 13 June but before 20 June:

Date Net invoice value VAT VAT rate
13 June 2020 £100.00 £20.00 20%
20 June 2020 £100.00 £5.00 5%

To edit the VAT rate on a recurring invoice:

  1. From Sales, select Sales invoices, then the Recurring Invoices tab.
  2. Select the recurring invoice you want to edit.
  3. Change the VAT rate to Lower Rate 5.00%.
  4. Save.

Recurring payments and receipts

If you have set up recurring Payments or Receipts which relate to hospitality, holiday accommodation and attractions, you must change them before they next recur on, or after, 15th July.

You cannot amend the value of a recurring payment or receipt, you must stop the recurrence on the last recurring entry before the rate change and set up a new one with the reduced VAT rate to start on the first recurrence date on or after 15 July, then make that transaction recurring.

Locate your recurring entries

  1. From Banking, click the Bank Account you want to view.
  2. Change the From date to a date before the oldest current recurring entry occurred.

    For example, you have a recurring entry every 3 months. If the next entry is 15th July, set the From date to 15th April or before.

  3. Change the To date to today.
  4. You will see in the Recurrence column. This is the last recurrence in a sequence.

Cancel the Recurrence

  1. Click the transaction to open the details.
  2. Go to Edit Recurring.
  3. Select Stop Recurrence.
  4. Save.

The recurring icon will no longer appear next to the transaction.

You will now need to set up a new recurring entry with the correct VAT rate of 5.00% then make it a recurring transaction.

Bank feeds and bank statement imports

When bank transactions are imported, either via a bank feed or a bank statement, the VAT rate used on similar transactions is memorised automatically.

Similarly when you create a bank rule, the VAT rate applied to import a bank transaction is set on the rule.

If you're in the hospitality industry, the VAT rate applied to some items may change from 15th July 2020, so you'll need to make sure you manually select the correct VAT rate on applicable transactions and edit any affected bank rules.

What do I need to do?

When importing transactions from a bank feed or bank statement, make sure you check and select the correct VAT rate before creating a new transaction.

If you're using bank rules, edit the rule and change the VAT rate.

We recommend you manually check transactions relating to hospitality, holiday accommodation and attractions around 15 July to check the default VAT rate you have set up is appropriate for the transaction.

Edit a bank rule

  1. From the incoming bank transactions list, select Rules.
  2. Select the rule to change.
  3. Change the VAT Rate or category.

Change the category, if you've set up new categories to use the lower rate VAT. See Categories

Quotes, Estimates, Pro Forma & Draft Invoices

If you issue Sales Quotes, Estimates or Pro Forma invoices, or, have Sales or Purchase invoices saved to Draft then you may want to change the VAT rate from the Standard VAT rate of 20.00% to the Lower rate of 5.00% before you convert them to an Invoice.

If you do this you can re-issue them to your customers to update them with the changes to the VAT rate.

Alternatively, you can update the VAT rate on the invoice.

Sales Quotes and Estimates

The process to change quotes and estimates is the same.

Before you update Quotes and Estimates, ensure you have updated any VAT inclusive prices.
  1. From Sales select Quotes & Estimates.
  2. Check the From and To date range will locate your documents, then Search.
  3. Select which document you want to change, then Edit.
  4. Change the VAT Rate to Lower Rate 5.00%.
  5. Select Save, Save & Email or Save and Print as required.

You can now Create Invoice with the correct VAT rate applied.

Once you have converted to an Invoice you cannot edit a Quote or Estimate. If you need to change the VAT you must edit the invoice.

Pro Forma & Draft Invoices

The process to change Pro Forma and Draft invoices is the same.

  1. From Sales select Sales Invoices or from Purchases select Purchase Invoices.
  2. Check the From and To date range will locate your documents, then Search.
  3. Select which document you need to change, then Edit.
  4. Change the VAT Rate to Lower Rate 5.00%.
  5. Select Save, Save & Email or Save and Print as required.
You can filter the invoice list to show the type of document you are looking for. To do this, select More, then in Status change the drop-down to Pro Forma or Draft and Search.

Copying quotes, estimates, invoices and credit notes

If you copy existing transactions that relate to hospitality, holiday accommodation and attractions, you may need to change the VAT rate applied before saving the invoice.

To do this:

  1. Select the transaction you want to copy.
  2. Click Copy, then make any necessary changes to the new invoice if required.
  3. For any items on the transaction that relate to hospitality, holiday accommodation and attractions, change the VAT rate to Lower Rate 5.00%.
  4. Click Save.

Flat Rate VAT

The government guide to calculating how much VAT you should pay has been updated to explain how to account for the VAT rate change. For full details, see:

https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

In Sage Accounting, you first need to identify which transactions should be processed at the reduced rate.

  1. Calculate the VAT Return for the full VAT period and print the Detail report.
  2. Find transactions that appear in Box 6 of the VAT Return dated after 15 July.
  3. Identify which of these transactions also appear in Box 1 of the VAT Return.
  4. Add the Gross (VAT inclusive) values of these transactions.

    •      Multiply the total by 12.5%.
    • Multiply the total by 4.5%.
    • Calculate the difference.
  5.        Adjust box 1 and reduce the value owed by the difference.

  6.      Submit the Return to HMRC.

Example

  • A VAT Return at 12.5% gives a Box 1 value of £10,000
  • Box 6 contains £500 (Gross) of transactions that should be at 4.5%
  • £500 * 12.5% = £62.50
  • £500 * 4.5% = £22.50
  • The difference is £40
  • Adjust Box 1 down by £40.

Future-dated transactions

If you've entered a transaction before 15 July that's dated between 15 July 2020 and 31 March 2021, and it relates to hospitality, holiday accommodation and attractions, you may need to change the VAT rate from Standard 20.00% to Lower Rate 5.00%.

The quickest way to see future-dated transactions is to run the Nominal Activity report.

  1. Go to Reporting and from the drop-down select More.
  2. Select Nominal Activity.
  3. For the Period choose Custom.
  4. Change the From date to 15/07/2020.
  5. Change the To date to 12/01/2021.
  6. Click Calculate.

    If you have no values in the Total Debits this period and Total Credits this period columns then you have no future dated transactions .
  7. Select Export Detailed.
  8. Confirm you want to Export All Accounts.
  9. Select your preferred format (CSV or PDF).
  10. Once completed, the Detailed Nominal Activity report shows in your reports folder at the top of the screen.
To refine the report by category, select the check box next to the ledger codes that have a value in the Total Debits this period and Total Credits this period columns, this then exports only the selected categories.

Legal disclaimer

This article provides general rather than specific guidance to assist all of our customers. We always do our best to make sure that the information is correct but as it's general guidance, no guarantees can be made concerning its suitability for your particular needs. The information is valid at the time of publishing and is provided without any warranty of any kind, express or implied. You should take professional advice if you require specific guidance on your individual circumstances, for example to ensure that the results obtained from using our software comply with statutory or regulatory requirements.

For VAT, customs and excise and duties enquiries you should call the HM Revenue and Customs (HMRC) National Advice Service Helpline on 0300 200 3700, contact your local HMRC office or visit their website at www.hmrc.gov.uk. In no event will we be liable to you for any direct, indirect, consequential or incidental loss or damage arising out of or in connection with your use of the information provided.