The 5% VAT boost to your cashflow

Cashflow & Forecasts, Coronavirus, Finance, VAT,

The 5% VAT rate cut is temporary, designed to boost the hospitality industry as we come out of Coronavirus. It is effective until 12th January 2021, after which the rate for all affected areas will return to 20%, or the prevailing VAT rate at the time.

There is though, an opportunity for this to bring an unusual cashflow boost to the Hospitality industry.

When such a scheme is launched, it usually has ‘anti-forestalling provisions‘ attached. This is a technical term that means that businesses usually cannot issue invoices dated during the rate reduction, for services that are provided afterwards.

For example:

If you book a holiday for June 2021 now, you can be invoiced and pay the full amount before the 12th January rate reverts to 20%.

Thus you would pay 5% VAT, and save money.

If you book now and pay after 12th January 2021, you will have to pay 20% (or the prevailing rate at the time).

HMRC have explained the decision not to apply the anti-forestalling legislation as follows: ‘The new temporary reduced rate of VAT for tourism and hospitality was introduced to help businesses in these sectors who have been severely impacted by Covid-19 and social distancing measures.

As no anti-forestalling legislation was introduced to accompany this relief, normal tax point rules will apply. This will result in all supplies of affected services which are paid for, or take place, in the six months in which the relief is operation being covered by it. Allowing businesses to obtain the relief on bookings which are pre-paid during the six months but take place in the future will aid in the recovery of these sectors which should also support employment as lock down restrictions are lifted.’

Our advice would be that this could be a boost to cashflow for you if your business operates within this sector BUT there are things to consider:

  1. Put the funds to cover the costs of the service into a separate account until you incur the costs; don’t lose sight of the fact that you’ll have to pay it out!
  2. In your accounts system you’ll need to show that the money received is a deposit and not a sale until the actual date the service is performed. The sale is only made once the holiday date (or similar) arrives e.g. June 2021.

If you’re unsure, please get in touch. This is an unusual situation that could be helpful, but equally, could cause you problems if you’re not careful!