VAT rate cut for hospitality extended in Budget 2021
On 3 March 2021 Chancellor Rishi Sunak delivered Budget 2021. Unsurprisingly most of the Budget measures were targeted at addressing the fall out from the COVID-19 pandemic. On the VAT front this included extending the VAT rate cut for the hospitality and tourism sectors.
A temporary measure
In July 2020 a temporary reduction in the VAT rate to 5% was introduced in order to aid recovery for these sectors which had been badly hit by the pandemic during 2020. See our earlier blog articles here and here for details of the scope of the measure.
The reduced rate was originally due to end on 12 January 2021. In December 2020 the end date was extended to 31 March 2021. However, businesses in these sectors had to close again as a result of the new lockdown announced in January.
What was announced in the Budget?
Hospitality and tourism have been one of the hardest hit sectors over the past year. There are 150,000 hospitality and tourism businesses which employ over 2.4 million people.
To protect jobs in the sector Rishi Sunak announced in the Budget that the 5% reduced rate of VAT will be extended again for six months to 30th September. Then from 1 October 2021 there will be an interim rate of 12.5% for another six months. The VAT rate will not return to the standard rate until April 2022.
As a result of these changes VAT will be cut by almost £5 billion over the next year.
Other VAT measures announced
VAT threshold: The VAT registration and deregistration thresholds will not change for a further period of two years from 1 April 2022. The existing VAT registration threshold is £85,000 and VAT deregistration threshold is £83,000.
New VAT penalty regime: A replacement to the default surcharge system for late VAT returns and payments was announced. It is scheduled to apply for VAT periods starting on or after 1 April 2022. The new regime will be based on a points system for each offence. Taxpayers will receive a point every time they miss a submission deadline. HMRC will notify them of each point. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. See the Budget Penalties for late submission policy paper and Penalties for late payment and interest harmonisation policy paper for further information.
Extension of Making Tax Digital for VAT: As previously announced in July 2020, Making Tax Digital will be extended to all VAT registered businesses with effect from their first VAT period starting on or after 1 April 2022. See the Budget Extension of Making Tax Digital for VAT policy paper for further information.
VAT deferral payment scheme: As announced in September 2020, legislation will be introduced to enable businesses that took advantage of the VAT payment deferral COVID measure to spread repayment of the deferred VAT over up to 11 interest-free instalments. A penalty of 5% will be introduced in relation to the amount of the deferred VAT that is outstanding if businesses have not paid in full, opted into the new payment scheme or made an alternative arrangement to pay by 30 June 2021. The normal default surcharge approach will not apply to deferred VAT. See the Budget Legislating for the VAT deferral new payment scheme and deterrent policy paper for further information.
The full set of Budget 2021 documents are available here.
Tax Day – 23 March 2021
This year the Government will publish a number of tax consultations and calls for evidence on 23 March 2021 — a day being dubbed in Whitehall as “tax day”. This includes documents and consultations that would traditionally be published at a Budget.
In a letter to MPs on the Treasury select committee, Jesse Norman, financial secretary to the Treasury said:
“The goal of making these announcements separately to the Budget, but still all on a single day, is to give a range of important but less high profile measures greater visibility among, and opportunity for scrutiny by, parliamentary colleagues, tax professionals and other stakeholders.”
Several of the consultations will relate to the government’s 10-year tax administration strategy which is aimed at improving the resilience and effectiveness of the UK’s tax system.
We will provide further details on these consultations once they have been published.