The 5% VAT holiday paradox

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In my earlier article, The biggest problems clarified, I explained how the ‘basic tax point’ could be used for liability purposes with the VAT rate reduction – ie the date when the customer receives goods or services, rather than the ‘actual tax point’ based on an earlier payment being received or sales invoice being issued when 20% VAT applied.

However, this outcome is wholly at the discretion of the supplier, it cannot be demanded by the customer.

Example

Jane paid Seaside Hotel the full price of £1,000 plus £200 VAT for her August 2020 holiday in January 2020 being.

The owner of Seaside Hotel decided not to issue any VAT credit notes for advance payments or invoices (VAT Notice 700, paras 30.7.4 to 30.9.2) for stays that take place after 15 July 2020 when the 5% VAT rate took effect on supplies of overnight accommodation.  Jane cannot demand a VAT credit – it is the choice of the business owner.

Result: Jane paid 20% VAT on her summer holiday, despite the VAT rate reduction.

No anti-forestalling

A big shock for many tax advisers was that the legislation (SI 2020/728) to bring about the VAT rate reduction did not include anti-forestalling  provisions.

Legislation is usually passed in such cases to prevent a business from issuing sales invoices and receiving payments before VAT increases again, which are relevant to supplies that take place after the rate increase.

Example

It is 15 August 2020 and Jane had an excellent holiday at Seaside Hotel and wants to return again in August 2021. The owner tells her that if she fully pays for her 2021 stay now, they will correctly charge her £1,000 plus £50 VAT. This has saved Jane £150 compared to her 2020 holiday.

Result: Jane’s 2021 holiday will be subject to 5% VAT, despite the fact that the VAT rate on overnight accommodation will be back to 20% from 13 January 2021.

HMRC explanation

The absence of anti-forestalling legislation will be welcomed by businesses in the tourist sector, giving cashflow opportunities such as the deal with Jane.

I asked HMRC the reason for the surprising decision. A spokesperson explained, “The new temporary reduced rate of VAT for tourism and hospitality was introduced to help businesses in these sectors who have been severely impacted by Covid-19 and social distancing measures.

“As no anti-forestalling legislation was introduced to accompany this relief, normal tax point rules will apply. This will result in all supplies of affected services which are paid for, or take place, in the six months in which the relief is operation being covered by it. Allowing businesses to obtain the relief on bookings which are pre-paid during the six months but take place in the future will aid in the recovery of these sectors which should also support employment as lock down restrictions are lifted.”

Bad debt risk

Jane has paid for next year’s booking on 15 August. She would still benefit from the 5% rate if she delayed payment until 12 January 2021, because the 5% VAT rate applies up to this date. This would appear sensible for Jane.

As we know, there is a risk that many businesses will be badly affected by the end of the government’s furlough support in October and may not survive. The VAT saving is good news for Jane but I’d be tempted to persuade her to wait until 12 January and then pay the hotel.

Also, she may be well advised to pay by credit card, so her funds are protected should the hotel go bankrupt between January and August 2021. The actual outcome in such a situation would depend on the terms of her credit card.

https://www.accountingweb.co.uk/tax/business-tax/the-5-vat-holiday-paradox