Dealing With VAT Rate Cuts by Matt Bryant

Matt Bryant from Zig Zag Chartered Accountants:

The standard rate of VAT will be temporarily cut for a six-month period from 20% to 5% on selected goods and services, taking effect from Wednesday 15 July 2020 until 12 January 2021.

It is anticipated that this will provide a much-needed stimulus to the UK economy in the current uncertain environment.

The rate cut will apply to supplies of certain food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises across the UK.

It will also apply to supplies of accommodation and admission to attractions across the UK.

The cut in the VAT rate is expected to assist businesses in increasing their sales and to bounce back from the current situation created by the Covid-19 pandemic. It will however create additional administrative burdens.

The extent to which businesses will be affected will vary, however, the following non-exhaustive, broad considerations are relevant when developing an action plan to deal
with the rate cut:

  • It is important that businesses understand how the rate cut will impact them. In particular they need to understand when their sales take place for VAT purposes, ie the ‘tax point’, to enable them to correctly determine the rate of VAT to apply.
  • The accounting software used should be capable of dealing with multiple VAT rates.
  • The accounting software master data should be reviewed and updated.
  • Retailers should ensure that their tills are configured to deal with the reduced VAT rate from 15 July 2020.
  • It may be necessary to contact software providers for assistance in preparing the accounting system for the change in rate.
  • Prices of goods and services that are displayed VAT inclusive in shops, online etc need to be amended if the VAT rate cut is being passed onto the customer.
  • Affected business should be reviewing their pricing policies in view of the VAT rate cut, particularly where their customers are unable to recover VAT on their purchases.
  • Consideration will need to be given to procedures for correctly accounting for VAT where a business offers products or services attracting both the standard and reduced rate of VAT
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