Currently, there is a reduced rate of VAT for the hospitality and tourism of 12.5%.
In the midst of the COVID-19 pandemic in 2020, Chancellor Rishi Sunak announced a temporary 5% reduced rate of VAT, which was replaced by the new 12.5% reduced rate from the 1st of October 2021 until the 31st of March 2022.
This reduced rate of VAT applied to hotel and holiday accommodation as well as hospitality businesses such as cafes, restaurants, takeaways and bars (excluding alcohol).
Additionally, it also included admissions to certain attractions such as tours, garden, and shows in a bid to help rescue some of the industries that were hardest hit by the pandemic.
However, with VAT rates returning to normal at the end of next month, how can you prepare for the rise in VAT? And what options are available if you struggle to pay?
We investigate in this blog…
What changed and when?
Income from hospitality and tourism activities is usually liable to 20% VAT, the highest VAT rate in the UK.
However, with the hospitality and leisure sectors being amongst the most severely affected by the pandemic, the temporary 5% rate was brought in in July 2020 to help protect businesses and jobs.
Originally, the rate was supposed to be restored to 20% in January 2021, but this date was extended to the 1st of April 2021.
The Chancellor then announced in his first Budget that this would be extended again until the 30th of September, with a new 12.5% reduced rate applying from the 1st of October 2021 until the 30th of March 2022.
So far, the government is planning to restore the 20% VAT rate from the 1st of April 2022.
So, what happens next?
Some industry bodies have been campaigning to extend the reduced rate of VAT or even reduce it permanently.
In fact, a coalition of the UK’s biggest hospitality and tourism bodies warned the chancellor that returning the rate to 20% “risks derailing the recovery at a time when businesses are still in survival mode.”
Many have predicted that a return of VAT to its pre-pandemic levels would restrict growth and risk even more job losses in these already hard-hit sectors whose collective income is down by a staggering £100bn.
Basically, with 12,000 businesses having permanently closed as a result of the pandemic and 660,000 people having lost their jobs, the coming months are precarious.
Indeed, according to a recent survey, 77% of businesses thought the reduced VAT rate was important or crucial to viability, and one in 10 companies even predicted that they would probably have to close down altogether
How to prepare
The reduced rates of VAT have offered significant benefits to businesses over the past 18 months, enabling them to retain pricing levels, profit from paying less VAT, or reducing prices to stimulate sales, enabling them to recover from the pandemic.
However, with VAT rates returning to normal in April, all that is set to change – which is why it’s important to be as prepared as possible.
Begin by looking closely at your cash flow to see if there are any ways you could bring in some more funds. Set up a daily cash flow control to keep track of all expenditure, and be sure to cut as many costs as possible.
Question each and every expense, and you could even liaise with suppliers to try and negotiate better deals for the coming months; then use all this information to make a clear financial forecast so you know exactly what expenses to expect and when.
If you still need more money, you could consider injecting more cash into your business by borrowing money.
From invoice factoring and discounting to asset-based funding, we share expert advice on how to raise money for your business in this blog
What happens if I miss a payment?
Despite the preparations outlined above, it’s still possible that you might not be able to afford VAT payments. In this situation, however, the most important thing to do is not to panic.
Yes, as a director it’s your duty to ensure VAT payments are cleared in time – but if you are struggling to pay HMRC, there are options available:
Three different options to consider if you miss your VAT payments:
1. Consider a Time to Pay arrangement
A Time to Pay arrangement (TTP) is an agreement with HMRC that lets you repay your debts over a set period to give you some much needed breathing space. They will ask several questions, such as:
- why you are unable to pay in full and on time
- what you have done to try and pay the debt
- how much you can pay now
- how long you will need to pay the rest
You can learn more about how to apply for a Time to Pay with HMRC in our dedicated blog.
2. Think about a Company Voluntary Arrangement
A company voluntary arrangement will take the pressure off straight away, enabling you to pay back what you can afford in a sustainable manner over a set period of time.
At McAlister & Co, we are experts in arranging CVA deals with creditors, including HMRC, to help you rescue your business and turn things around. You can find out more about what’s involved in the CVA process in our blog.
3. Start over with a Pre-Pack Administration
Alternatively, you could consider a pre-pack administration. This is a way of restructuring a business so it can be packaged and sold to a new company that is often controlled by the same directors as the old business.
It essentially gives you the chance to restart without your debts, whilst also protecting your company from aggressive legal action by HMRC.
Need further help and advice?
For additional help and advice on how to prepare for and pay the increased VAT rates in hospitality and tourism, contact McAlister & Co today. As business insolvency experts, there’s nothing we don’t know about dealing with HMRC and helping businesses to turn things around.
So don’t suffer in silence – let us help you rescue your business today! Alternatively, for specific advice tailored to the hospitality industry, don’t miss this helpful guide.
