Some businesses will have to deal with four rates of VAT in their accounting systems from 1 October 2021.
This has not happened since 1979 and will hopefully not happen again after 31 March 2022 when the temporary 12.5% rate for most sales made by the hospitality industry will end and the 20% rate will resume on 1 April 2022. We will then be back to three VAT rates: 0%, 5% and 20%.
In a nutshell, the supplies made by the hospitality industry that have been subject to 5% VAT since July 2020 will become liable to 12.5% VAT for the period between 1 October 2021 and 31 March 2022. For most hospitality suppliers, it will be a case of just changing the VAT code from 5% to 12.5% on their software – job done.
There is no anti-forestalling legislation in place for either the rate increase on 1 October 2021 or 1 April 2022.
There is an easy VAT fraction of 1/9 with the 12.5% rate. So, for example, if you pay £90 including VAT for a night’s accommodation in a hotel, and the hotelier has not itemised the VAT as a separate figure, you know that your potential input tax claim is £10.
If you raise a sales invoice or receive an advance payment at the 5% rate of VAT before 1 October 2021, and then it is adjusted after this date, perhaps because of an order cancellation or price adjustment, the VAT rate for the credit note will be based on the rate originally charged. This is helpfully confirmed by HMRC’s guidance: VAT Notice 700, para 18.2.5
Flat rate scheme (FRS) – new percentage rates
From 1 October, the FRS rates will increase for the following three categories:
- Catering services including restaurants and takeaways: 4.5% will increase to 8.5%
- Hotel or accommodation: 0% will increase to 5.5%
- Pubs: 1% will increase to 4%
There will be a further challenge for businesses that do not complete calendar quarter VAT returns; therefore, there will be two FRS rates for VAT returns ending at the end of October or November.
A restaurant completing a VAT return for the three months to 31 October, which uses the FRS will account for 4.5% VAT on its August and September gross takings and 8.5% for receipts in October.
Rejoin the scheme?
Depending on the mix of sales between 0%, 5% and 20%, some businesses that left the FRS in July 2020, due to potential increased VAT payments, might want to rejoin on 1 October 2021 or possibly 1 April 2022. This is fine because a business can rejoin the scheme at any time if it has been out of the scheme for at least 12 months.
Adaptabe accounting systems
The 12.5% rate should be easy to deal with if accounting systems are flexible. With the UK now able to make more VAT changes post-Brexit, no longer having to comply with EU law, there might be temporary VAT rate movements in other sectors in the years ahead.
It is worth checking that VAT rates can be easily adjusted if you change your accounting system.
To quote VAT Notice 700, section 30, “When a VAT rate or liability is changed, it may have to be introduced at short notice. HMRC recommends that your accounting system – whether or not you use a computer – is designed to allow you to adjust to the change without difficulty.”