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How will the hospitality VAT cut affect customer deposits?

It is fairly common, particularly in the summer holidays, to pay a deposit when booking a hotel or self-catering hospitality accommodation but how should the deposit be accounted for?


HMRC have confirmed that the hotel has the option of charging VAT according to the ‘basic tax point’ (dates of the stay) rather than the ‘actual tax point’ (invoice/payment dates).

For example, where the customer paid a non-refundable £300 deposit in February 2020 for a £1000 holiday in Cornwall in August, using the actual tax point, the hotel would account for 20% VAT on the deposit received in February 2020 and 5% on the balance payable after 15 July 2020.  The hotel could choose to use the basic tax point rule which would mean that the 5% rate would apply to the entire cost of the stay and make an adjustment for the VAT already accounted for.

Cut in VAT for UK hospitality

In early July, the government announced a dramatic cut to VAT in the UK hospitality sector from 20% to 5%. As a result, many hospitality businesses are dropping prices to attract customers and bring in much-needed revenue. According to the guidelines, the VAT cut applies to ‘organisations that make supplies of hospitality, hotel and holiday accommodation and admission to certain attractions, and their advisers.’

The VAT cut applies to certain items and took effect from 15 July 2020 and extends until 12 January 2021. Supplies to the following industries will benefit from the reduced VAT rate:

  • food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs
  • hot takeaway food and hot takeaway non-alcoholic beverages
  • sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities
  • admissions to the following attractions that are not already eligible for the cultural VAT exemption such as:
  • theatres
  • circuses
  • fairs
  • amusement parks
  • concerts
  • museums
  • zoos
  • cinemas
  • exhibitions
  • similar cultural events and facilities

Making Tax Digital (MTD) will apply to all VAT-registered businesses.

Should you expect a discount?

Although we have seen a number of big-name hospitality brands pass these benefits on to the customer by dropping their prices, firms aren’t obliged to do so. The Treasury has said that they will look to businesses to pass on the benefits of a VAT cut to customers, but it is down to individual companies to decide their own prices. Considering the loss of income incurred this year due to COVID-19, small, independent hospitality businesses may want to recoup some of their losses.

This extends to the hotel sector, with customers reporting a variety of price reductions. Some hotel businesses have decided to reimburse or cut prices moving forward, while others are still reviewing their pricings despite the VAT benefits being in place for some time.

Get in touch

Please contact us if you need advice on dealing with the invoicing or accounting for such transactions.

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