VAT next for the beleaguered hospitality sector?

Stuart MacPherson, business services manager at Meston Reid & Co

By Stuart MacPherson, business services manager at Meston Reid & Co

THE UK’s hospitality sector has been harder hit than most by the Covid-19 pandemic and its consequent restrictions.

The initial shutdown to limit the spread of the virus has been followed by an unpredictable pattern of limited openings, further closures and complex curbs on operating practices.

More recently, issues around staff recruitment and even the reliable supply of food, drink and other materials have presented difficulties for the industry. And will its long-term wellbeing be further undermined by new post-lockdown customer trends – how quickly will some people find the confidence to step inside busy bars, restaurants and the like?

On top of all that, there’s now another potential challenge on the horizon – this time in the taxation arena.

In July 2020, the Government introduced a temporary reduced rate of 5% VAT on certain supplies in the tourism and hospitality sectors. The overarching aim was to help protect business and jobs, supporting the economy as it re-opened following the initial lockdown measures.

The reduction was initially planned to last until January 2021 but has since been the subject of a couple of extensions. It remains in place until 30th September 2021, when a new reduced rate of 12.5% will take effect until March 2022. At that point, the standard 20% rate of VAT will again apply.

The lower rate has clearly been a welcome step for many businesses trying to negotiate their way through these toughest of economic times, but its end signals a new challenge. Those businesses will now need to start budgeting for the increased VAT rate at a time when they’re already facing financial pressures across a sector that has experienced – and continues to experience – enormous uncertainty.

For some, there may be a compounding factor: They may already be paying off VAT arrears after taking advantage of a 2020 HMRC VAT deferral scheme, or indeed still have to do so.

One silver lining is events that are invoiced, or monies received, in advance prior to the 1 October 2021 change can still apply the 5% rate.  So, it will be advantageous to get as much business booked in September as possible, including Christmas bookings, and invoice whilst the lowest VAT rate can be utilised.

In general though, it all adds up to an inhospitable environment for the hospitality industry.

Whilst every situation will be different, there are a few steps that businesses can take. These include looking at ways to have a real-time picture of their financial state of play; sourcing additional funding for your business and entering into structured negotiations with HMRC.

Given the degree of complexity, businesses would be best advised to seek the support and advice of a financial advisor to help them through to better times.

Stuart MacPherson is a senior business manager at Meston Reid & Co, an Aberdeen-based chartered accountancy practice that has a broad range of clients, from start-ups to large businesses with international operations. The vast majority of its clients are based in the North-east of Scotland.

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