UK cuts hospitality and tourism VAT to 5% till Jan 2021
- Jul 8, 2020 | Richard Asquith
The UK has cut the reduced Value Added Tax on hospitality services from the current 20% standard rate to the reduced rate of 5% on 8 July 2020 in the Chancellor’s economic update. The measure will be in place from 15 July 2020 until 12 January 2021. It will cost £4billion. The UK has already spent £49billion in public COVID support.
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The UK rate cut covers: Restaurants; cafes; pubs (ex alcohol); hospitality; hotels; B&B's; home rental; caravan and tent sites; hot take away food; theatres; fairs; circuses; amusement parks; concerts; museums; zoos; cinemas; studio or factory tours; botanical gardens; exhibitions; and similar cultural events and facilities. The reduction only applies on entrance fees to the attractions listed; not other supplies provided during the visits such as souvenirs. However, if the goods are part of the admission fee and are incidental to the main supply, the whole supply is eligible for the temporary reduced rate.
Note: served alcoholic drinks will not benefit from the cut. It excludes entry into sporting events. The UK has already brought forward reduced VAT rate cuts for e-books.
Most European countries offer reduced rates on tourism and cultural serves; several have cut them further for the rest of this year to support the hard-hit sectors during COVID. Prior VAT rate cuts on specific sectors have shown inconclusive benefits; usually retained by retailers and merely brining forward demand rather generating new spend. Follow our global COVID VAT measures.
Hospitality covers: restaurants; cafes; entrance to tourism and cultural events; hotels and accommodation - including house rentals.
UK amongst highest tourism & hospitality rates in EU
The UK has one of the highest VAT rates on the tourism and entertainments sectors. Most other European countries have previously taken advantage of EU rules which allow reduced VAT rates on these services.
VAT cuts have questionable benefit for consumer spend
VAT cuts targeting tourism and hospitality show mixed outcomes. A reduction in the French restaurant VAT rate in 2009 from 19.6% to 5.5% was mostly retained by the business owners. An Irish tourism VAT rate cut from 13.5% to 9% following the Euro currency crisis in 2011 was again largely retained by the providers.
Some studies on VAT rate changes have shown asymmetric movements on prices: cuts are retained by the vendor; rises are passed onto the consumer.
EU freedoms on VAT rates
The UK was always free to reduce its VAT rates in this area whilst still a member of the European Union. Under the Brexit transition period, which ends on 31 December 2020, it must still observe EU VAT rules.
The European VAT Directive, the rules for the 27 member states, requires full, standard VAT rates on most goods and services. This is to prevent unfair competition via tax subsidies between states. However, it does allow for reduced rates for specific services and goods. This includes tourism, cultural and accommodation services.