The past few years have seen many VAT changes hit the hospitality sector. Changing the VAT rate for hospitality businesses three times in two years due to the pandemic certainly created some additional complexities in making sure systems could cope with and use the 'right' VAT rate.

Software and Automation

The increase in the widespread use of accounting software (to comply with MTD rules) has simplified VAT processing for many businesses. However, incorrect classification and calculation of VAT can still occur and is sometimes harder to spot when the 'computer does it for you'.

A simple example of this is where rules / automation can be set up to automatically assume all purchases of a particular 'type' e.g. laundry and cleaning, have input VAT included at 20%. If a new supplier is used that isn't VAT registered, the system may (incorrectly) assume that the costs for this new supplier include VAT.

Our message - use the systems to automate and save time, but do check individual entries and always sense check before submitting your VAT return.

UK VAT / Not UK VAT?

Another area where we often see businesses rely on software pre-set VAT rates incorrectly is in relation to booking agent commissions. VAT is often automatically reclaimed on agent commissions without considering if UK VAT has been charged. In many cases booking agents don't have a fixed establishment in the UK and as such UK VAT is not commonly charged. Instead, the reverse charge mechanism should be applied (subject to the hospitality business confirming they are a business for VAT purposes, perhaps by supplying their UK VAT number to the booking agent).

Our message – be careful when dealing with reclaiming VAT on booking agents as many (of the big ones) are not UK businesses.

Tax Point

We often get asked about when to account for VAT on certain items e.g. deposits. This all depends on the 'tax point'.

The tax point is generally the earlier of the monies being received or the invoice date, unless in the unlikely event the date of stay occurs before either of these. Each receipt, be it full payment, a deposit, part payment or a final payment will therefore each have its own tax point date. This often leads to the VAT due on a hotel booking being spread over a number of VAT returns.

The correct identification of the tax point is equally as important when considering if a business has exceeded the VAT registration threshold. The rolling total calculation should be based on the individual tax points rather than the date of the stay.

Our message – assess if your computerised accounting system is applying VAT at the right 'point in time, especially in relation to deposits and part payments.

Flat Rate Scheme

Many businesses in the hospitality industry find it beneficial and more cost effective to be registered under the Flat Rate Scheme.

Whilst cloud accounting software may deal with the Flat Rate Scheme calculations for you, again, it isn't foolproof and there is a common misconception around booking agent fees.

Under the Flat Rate Scheme, VAT is charged to customers on all sales at the normal VAT rate (i.e. your invoices look the same as before using the scheme) however you pay over VAT to HMRC based on a set proportion (usually 10.5% for hotels / 12.5% for catering services / 6.5% for pubs) of your total sales income.

A very common misconception is where booking agencies deduct their fees first and only send on net income (after commission). In this case, the flat rate scheme proportion is still applied to your gross total sale – the figure before they deduct commission.

If any of the above has raised questions that you would like to discuss further, then please speak to your usual Dodd & Co contact.