Extension to the reduced VAT rate for the tourism, leisure and hospitality industry

In his Budget statement the Chancellor has confirmed that the reduction in VAT for tourism, leisure and hospitality businesses from 20% to 5% has been extended by six months until 30 September. It will then rise to 12.5% for the following six months before returning to the standard rate of 20% in April 2022.

The VAT reduction is for many aspects of accommodation, food, drink (excluding alcohol) and tourist attractions. The reduction was originally due to end on 12 January 2021 before being extended to 31 March 2021 in the Chancellor’s Winter Economic Statement, when he said the reduced rate would help 150,000 businesses survive the winter months.

Ahead of the Budget, Boris Johnson referred to it as a “Budget for recovery.” There’s no doubt that businesses within the tourism, leisure and hospitality sector have been significantly impacted by the COVID-19 pandemic. Survival is their first priority and they certainly need help to recover from the effects of the past 12 months.

The VAT reduction first came into force on 15 July 2020, and just 16 weeks later, on 3 November, many businesses in the industry were again forced to temporarily close their doors. Many have not traded since and will not do so ahead of 31 March 2021, when the VAT rate was due to increase back to 20%. Therefore, of the 37 weeks that the reduction was due to be in place, some businesses were only able trade for 43% of the time, restricting their ability to benefit from the reduced rate.

With this in mind, the extension is a welcome boost to the affected businesses hoping for a positive 2021 summer season and beyond. However, it’s disappointing that the VAT rate will increase to 12.5% from 1 October 2021 before returning to 20% in April 2022. Many of our neighbouring countries have permanently lower VAT rates than the UK, with France, Italy and Spain all having a 10% VAT rate applicable to accommodation. This makes it potentially cheaper for consumers to head abroad rather than opt for a British staycation which would help the UK economy recover.

Further measures were announced in the Budget which will affect the tourism, leisure and hospitality sector. These include:

Further grants of up to £18,000 for businesses within the sector
A freezing of the duty payable on alcohol sales
Relaxation of corporation tax loss rules
Enhanced capital allowances
An extension to the 100% business rates holiday through to June 2021, with reduced relief available for the rest of 2021
The recovery of the tourism, leisure and hospitality sector will rely heavily on the support of the government packages and the confidence of the public, which will hopefully increase following the vaccine rollout.

If you have any concerns or queries, please get in touch with our Tourism, Leisure and Hospitality team. You can find contact details on the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk

Melanie Howard