What do Rishi Sunak's VAT discounts mean for hotels, cinemas and attractions?

Hospitality and tourism services are subject to a lower VAT rate of 5 per cent, instead of 20 per cent, from 15 July

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From 15 July, VAT on hospitality and tourism services will be reduced from 20 per cent to five per cent in a bid to reboot the UK economy.

Chancellor Rishi Sunak announced a raft of measures on Wednesday 8 July that will apply for six months till January 2021.

It has hoped it will inspire consumer confidence and get people using pubs, restaurants, and tourism services that have suffered under the impact of Covid-19 and the lockdown.

Mr Sunak told the House of Commons on 8 July: “I know people are cautious about going out but we wouldn’t have lifted the restrictions if we didn’t think we could do so safely.”

He explained hospitality and tourism were two of the “hardest hit sectors” during the pandemic but were some of the biggest employers nationwide; 1.4m workers have been furloughed in these sectors, the highest of any industry. “Our economy relies on consumption – especially social consumption,” he added.

This is everything you need to know about the VAT reduction.

What does this mean?

VAT on hospitality and tourism is normally charged at 20 per cent but for the next six months, this will be reduced to five per cent on food, accommodation and attractions.

From 15 July until 12 January 2021, Mr Sunak said the measure would apply to the following areas of consumer spending: eat in or hot takeaway food from restaurants, cafes and pubs, accomodation in hotels, B&Bs, campsites, and caravan sites.

As well as admission to attractions like cinemas, theme parks and zoos, and more, which were not listed.

Although the VAT cut will not apply to alcohol served in pubs or restaurants.

“This is a four billion pound catalyst for hospitality and tourism sectors benefiting over 150,000 businesses and consumers everywhere – all helping to protect 2.4m jobs,” he concluded.

The measure had already been called for by hospitality trade bodies, including UKHospitality, the British beer and pub association, and the Campaign for Real Ale, who all signed a joint letter to the chancellor, prior to Wednesday’s speech.

It called for the VAT cut to five per cent – applying to food, drink, accommodation and tourist sites. In a joint statement, the trade bodies said: “The employment, revenue and social value for communities provided by pubs will be vital to the recovery of our economy as we return to a new normal, however, with distancing measures in place, fewer customers and higher costs will severely impact the profitability and survival prospects of hospitality businesses.”

What is VAT?

VAT (value added tax) is a tax levied on the sale of goods and services in the UK. It is not a traditional type of tax (applied to your payslip from your employer) but one that is based on consumption as it is added to items that people buy.

It is also known as an indirect tax because it is not taken directly by the government but by businesses on behalf of the government.

Most goods and services in the UK, like hotels, cinema tickets, and theme parks, are subject to a standard VAT charge of 20 per cent. Only some are normally reduced to five per cent (for example, children’s car seats or energy-saving materials in the home).

Items that have no VAT include children’s clothes, stamps and most foods – items considered essentials (no VAT is charged on plain biscuits or cakes, when chocolate is added it becomes a luxury and is subject to VAT).

When someone charges you VAT they multiply their selling price by the VAT rate to calculate the amount of VAT to charge. They then add this to the selling price to give you the price you actually pay – this is called the ‘gross’ price.

Currently VAT in the UK is added prior to the point of transaction – so it is included in the cost of the item you are purchasing. No tax is added when you pay (unlike in some other countries).

Sometimes you will see VAT on a separate line on your bill or invoice, this does not mean you are paying extra, it just shows how much of the price is tax.

How will these VAT discounts work?

Guidance on the government website says: “Further guidance on the scope of this relief will be published by HMRC in the coming days.” This will include guidance on how businesses can implement the changes and what consumers can expect to see.

But it is likely customers will just see the impact directly on the cost of services – leading to a reduction in the price.

For services like hotels, a report by Ernst & Young, confirms VAT should be ahead in advance of delivering services – so it is likely costs will just be reduced for guests.

And for attractions where people are buying tickets, the cost of the ticket will be cheaper.

Luke Davis CEO of IW Capital, ​tells The Independent: “This period has been incredibly challenging for every sector of business and especially the hospitality sector, in which many businesses rely on packed spaces to make the most of custom.

“Today’s announcements will come as a welcome boost to the sector as they encourage people and customers who are very conscious of their finances to get back into pubs and restaurants.”