The 5% reduced rate of value-added tax (VAT) has been in place since 8 July 2020. The reduced rate has been extended on numerous occasions to factor in changes to the affected sectors over the course of the pandemic – and has been a lifeline for many affected companies.
But, from 1 October 2021, the 5% rate jumped to a new reduced rate of 12.5%, a change that could have significant cashflow implications if you’re one of the affected businesses.
Why was the reduced rate of VAT needed?
The hospitality, hotel and holiday accommodation sectors have been particularly badly hit by the impact of the Covid-19 pandemic. Many businesses saw huge drops in sales and predicted revenues as the effects of lockdown began to hit at the start of 2020 – and this put some businesses from the most badly affected sectors in real financial jeopardy.
- To help combat the cashflow issues caused by a sudden unpredicted drop in income, the Government introduced a reduced rate of VAT for certain supplies in the hospitality, hotel and holiday accommodation industries.
- Businesses in these specific sectors would only charge VAT at 5% on their affected sales (note: some items are unaffected), rather than the usual 20% standard rate of VAT.
- This meant hotels, restaurants and cafes could keep their selling prices the same, but because the VAT included was lower, keep more of the income in the business.
How will the new 12.5% reduced rate affect my cashflow?
Your hospitality or hotel business will have benefited financially from this reduced rate. But now you’re now faced with accounting for 12.5% VAT between 1 October 2021 and 31 March 2022. And then, from April 2022 onwards, reverting to the standard 20% rate of VAT for all the relevant sales.
This is a significant change in your cashflow position and something to factor into your financial planning for the end of Q4 2021 and into Q1 2022. For example:
Your hospitality or hotel business will have benefited financially from this reduced rate. But now you’re now faced with accounting for 12.5% VAT between 1 October 2021 and 31 March 2022. And then, from April 2022 onwards, reverting to the standard 20% rate of VAT for the relevant sales.
This is a significant change in your cashflow position and something to factor into your financial planning for the end of Q4 2021 and into Q1 2022. For example:
- Run forecasts to account for the VAT rate increases – using your historic sales information, it’s possible to run projections and forecasts to see how the jump in the VAT rate to 12.5% will affect your net revenues now, and the further impact it will have when the rate goes back up to 20% in April 2022.
- Review your working capital position – As the economy continues to recover from the pandemic, now is a sensible time to reforecast your entire cashflow and working capital position to take the current situation into account. The more detailed your projections, the more insight you’ll have into the impact on your cash position.
- Assess whether external funding is needed – if cashflow is still poor and working capital is projected to be reduced over 2022, the business may need to consider new routes to additional external finance. This means sourcing the right lenders, deciding on the most appropriate financial products and having the numbers, reporting and guarantees required for a finance application.
Talk to us about the impact of this change on your business
Being your tax adviser means more than just submitting the VAT return. As your accountant, we can also help you to forecast the short, medium and longer-term impacts of this increase in the reduced rate of VAT. And, if cash is needed, we can help search for external finance as well.
Come and talk to us about how the VAT increase will affect you and how we can help you strengthen your working capital and enhance your cashflow management.