The 2021 Budget was always going to be a big one. All eyes were focused on how Rishi Sunak was going to reopen Britain for business following this latest lockdown. And it appears that getting hospitality businesses back on their feet is a priority. The government has announced that the 5% reduced VAT rate for this sector has been extended by six months.
Let’s take a look.
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What is the 5% reduced VAT rate?
Back in 2020, the government introduced a 5% reduced VAT rate for businesses operating in the tourism and hospitality sector.
These businesses have been severely hit by lockdowns and social distancing measures, with many having to cease operating altogether. VAT usually stands at 20%, but it was dropped to 5% in order to support this sector. The idea was that businesses would then be able to reduce their prices in order to entice customers in.
How long has it been extended for?
The 5% reduced VAT rate was due to end on 31 March 2021. But we now know that it has been extended by six months, meaning it will remain in place until 30 September 2021.
But that’s not the end of it. It will then only rise to 12.5% for a further six months, before finally getting back up to the standard rate of 20% by April 2022.
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Which businesses will benefit?
This reduced VAT rate is solely for businesses operating in the tourism and hospitality sector. So don’t expect to see a reduction in VAT across the board.
It is available to businesses such as restaurants, cafes, pubs, staycation accommodation and attractions – think amusement parks, zoos and cinemas.
The reduced rate does not apply to alcohol, so your pint at your local won’t be any cheaper. But any food you order there could be.
How does this help me?
As VAT is usually just rolled into the price you pay, it may seem like you won’t really notice the reduced rate. But in theory, it should mean that you pay less for your goods and services at hospitality businesses.
I say in theory because how much you save depends on whether the retailer chooses to pass the rate reduction on. Technically, they could absorb the savings themselves and continue to charge you the same price. The reduction is discretionary.
If it has been applied, then you’ll see the discount added at checkout. Rather than having VAT as 20%, you should see it down as 5% on your receipt.
How big are the savings?
As VAT is a percentage of what you are paying, the more you spend, the bigger the savings.
So for example, what you save on your coffee and pastry from your local cafe won’t be as much as you’ll save on a family ticket to the zoo.
Whether it’s big or small, any sort of saving is welcome. The financially savvy among us would then squirrel the savings away for a rainy day.
This could be in an easy access savings account, where you can dip into your pot whenever you need to. Or you could build up your balance on a fee-free prepaid card like Revolut. This way, it is out of sight and out of mind. Then it could be used for a nice little treat once you have saved a healthy amount.
