A company, partnership or sole trader operates a furnished holiday let business and has been accounting for VAT at 5% on their holiday lets since the government introduced the temporary reduced rate for these sectors from 15 July 2020. This temporary reduced rate is due to cease from the end of September – how should they treat deposits and pre-payments they receive now before the end of the month?
While there will be a change to the temporary reduced rate from the end of the month, it is not due to cease altogether. In March 2021 the Chancellor confirmed that the temporary reduced rate for catering, holiday accommodation and admissions to attractions would be extended by a further year to the end of March 2022 – however this would be in two tranches:
- extend the period covered by the temporary reduced rate of VAT at 5% until 30 September 2021;
- increase the temporary reduced rate to 12.5% from 1 October 2021 to 31 March 2022;
supplies are then due to revert to the standard rate of 20% from 1 April 2022.
Therefore, what the operator now needs to do is to prepare for the increase in rate from 5% to 12.5%. A supply of holiday accommodation is a single supply of services: the basic tax point is completion of the service, but this can be overridden by the creation of an actual tax point.
An actual tax point is created by a pre-payment, advance issue of a VAT invoice, or issue of a VAT invoice after, but within 14 days of the basic tax point.
So where the operator takes a booking either with payment of a deposit or payment in full between now and 30 September (inclusive) this creates an actual tax point (in the case of a deposit, the tax point is created only to the extent of that payment and not for the whole value) even if the stay is due to take place on or after 1 October 2021.
Example 1 – deposit
Booking for holiday accommodation made 8 September 2021 for a stay on 8 October 2021
Room price £100 (inc. VAT)
Deposit paid with booking – £50 – VAT rate 5% = VAT due to be accounted for in September = £2.38 based on the VAT fraction 1/21
While the deposit creates an actual tax point it only does so to the extent of the payment received
Balance due on checkout – £50 – VAT rate 12.5% = VAT due to be accounted for in October = £5.56 based on VAT fraction 1/9
Example 2 – full payment
Booking made 8 September 2021, for a stay on 8 October 2021
Room price £100 (inc. VAT)
Full payment of £100 made at time of booking – VAT rate 5% = VAT due £4.75 (1/21)
Example 3 – no payment or deposit required
Booking made 8 September for a stay on 8 October 2021
Room price £100 (inc. VAT)
No deposit required
Full payment of £100 made on checkout on 9 October 2021 – VAT due at 12.5% = £11.11 (1/9)
So, as you will see from the examples above the operator can still benefit from the 5% rate for all payments they receive prior to 1 October 2021, even if the holiday stay takes place after the rate has increased. The government has not introduced anti-forestalling legislation to prevent this.
