The Chancellor has announced a temporary cut to the standard rate of VAT for food, accommodation and attractions, from 20% down to 5%.
Having already deferred VAT payments for businesses up to 30 June 2020 in a bid to help those struggling through the immediate effects of the coronavirus pandemic, the big question for today was whether the Chancellor was willing to go one step further and cut UK VAT rates in a bid to boost the economy.
For some businesses, the answer was yes.
From 15 July 2020 to 12 January 2021, the standard rate of VAT of 20% will be cut to 5% on supplies of food and non-alcoholic drinks from pubs, restaurants, cafes, and similar premises, as well as supplies of accommodation and admission to attractions across the UK.
This move aims to stimulate consumer demand and protect more than 2.4 million jobs in the hospitality sector, which began to fully reopen for business on 4 July 2020.
To work out the VAT on a gross payment, the VAT fraction will be 1/21.
For the man on the street, VAT is an absolute cost that cannot be recovered. Providing businesses pass the VAT cut on to consumers, goods and services in the hospitality and tourism sectors will cost less.
The remaining question is whether these measures are enough to get people spending in large enough numbers, when so many are still facing uncertainties in relation to their own jobs and financial security.
This seemingly simple tax measure will lead to more complexity for many of the businesses it affects. Small businesses using the VAT flat rate scheme may now need professional advice to work out whether the scheme is still worthwhile. At this point, no indication has been given as to whether the flat rate percentage rates will be reduced accordingly as well.
The reduction is also likely to cause problems for bookkeepers, as applying the new rate is not as straightforward as it would seem.
For example, the original rate may have been applied if payment was made in advance of 15 July, and credit notes against old invoices will still need to apply the original 20% VAT rate.
All this means additional care needs to be taken. In particular, businesses that use the cash accounting scheme may need to manage the timing differences of VAT, at both 20% and 5% for many months. For instance, if receipts are not allocated against unpaid invoices as they are entered, you may need to be mindful that the software is accounting for the receipts at the correct rate.
Cash registers and electronic tills may also need to be reprogrammed before next Wednesday - another task for businesses already struggling to keep pace with changes necessary to operate safely.
Looking ahead, there may be cashflow problems for businesses that have not set aside their VAT, which will struggle to pay the 20% VAT due for VAT quarters up to 30 June 2020 by 7 August 2020, while only collecting 5% from their customers.
HMRC is expected to issue further guidance over the next few days, which will hopefully provide more clarity.