Reduced rate VAT: Do you qualify for a lower rate?

During COVID-19, you may have noticed that the government offered reduced VAT rates for hospitality and other industries in a bid to stimulate the economy.

But there’s a little bit more to the reduced VAT rate in the UK.

What is reduced rate VAT?

Reduced rate VAT is a VAT cut to goods and services in the UK. It’s set at a lower rate than the standard rate of VAT. This lower rate can apply to some goods and services that are deemed to be ‘essential’.

The standard amount that the government asks businesses to charge the consumer is 20%. Sometimes they’ll reduce that rate of VAT down to 12.5% or even 5%. This reduces the cost of a good or service for the end consumer and ultimately encourages more spending in the economy.

And, just to make sure we’re all on the same page – if you’re not sure what VAT is:

VAT is a type of consumption tax that the government applies to most goods and services. Businesses are responsible for charging a little extra, collecting it and sending it to the government. That’s why you might hear VAT referred to as an indirect tax on the final consumer.

There are lots of different rules and regulations around VAT, like only businesses and sole traders who have a taxable turnover over £85,000 a year needing to register and pay it.

Reduced rate VAT is just another of those rules and regulations. There’s also zero-rate VAT, which you can learn more about here: Zero-rated VAT: Everything you need to know

Reduced rate VAT and the pandemic

When the pandemic hit, the UK government introduced a reduced VAT rate for hospitality and other industries through a VAT cut to 5% on 15th July 2020. It applied to the following industries:

• Hospitality
• Accommodation
• Attractions

The reduced rate was designed to help businesses in these industries to remain open and be able to offer lower prices. This was beneficial to households, as they were able to enjoy lower prices and access services they may not have been able to afford before.

Businesses in these industries also benefited from the reduced rate of VAT, as it allowed them to make more profit from their sales. Additionally, the reduced rate enabled businesses to remain open, providing much-needed employment opportunities and helping to keep the UK economy afloat during a difficult time.

The 5% reduced VAT rate in the UK was extended until 30th September 2021. The government then introduced a new reduced rate of VAT of 12.5% until the 31st of March 2022.

After this deadline, all companies in the affected industries went back to paying the standard 20% of VAT. So the hospitality VAT rate 2025 is back to 20%.

What goods and services still fall under reduced rate VAT?

Though the hospitality VAT rate in 2025 is back to standard rates, some goods and services continue to be eligible for the reduced rate.

Below, you’ll find some examples of goods and services eligible for reduced rate VAT:

For a full overview of eligible goods and services, we recommend you hop over to the government’s website.

Food and drinks have other specific VAT rates

If you’re wondering why food and drinks don’t show up in the table above, it’s because most food is eligible for zero-rate VAT – another kettle of fish entirely.

There are exceptions to this rule. These include certain non-alcoholic drinks like soft drinks and mineral water, which fall under standard-rate VAT.

It’s always worth checking your exact product and distribution method on HMRC’s website so you can be 100% certain what your VAT rate is.

What conditions do I need to meet for reduced rate VAT to apply?

The conditions for reduced rate VAT are all dependent on which industry you’re in and how you operate as a business.

Factors listed on the government’s website include:

• Who’s providing or buying the goods or services
• Where they’re provided
• How they’re presented for sale
• The precise nature of the goods or services
• Whether you obtain the necessary evidence
• Whether you keep the right records, and whether they’re provided with other goods and services

Additionally, there are specific VAT rules for certain trades that affect how you account for VAT, how much you must pay and how much you can reclaim.

To ensure that you meet the conditions for a reduced rate of VAT, be sure to consult the UK government's website for more information.

Is it possible to backdate the reduced rate VAT?

In general, it’s not possible to backdate the reduced rate VAT in the UK.

With hospitality, accommodations and attractions, the reduced rate of VAT was only applicable to things purchased within the period the reduced rate was declared. As the reduced rate of VAT has expired, businesses are required to charge the standard rate of VAT for any goods or services purchased.

If your goods or services are still eligible for reduced rate VAT and you’ve made errors in a previous tax return, then you may be able to amend this in your next VAT return.

Look for the net value box 1, the tax you owe to HMRC, or box 4, the tax HMRC owes you, on your VAT return.

Only certain errors can be self-corrected on your next VAT return. Check with HMRC whether you meet these criteria or whether you need to report the mistake to HMRC directly.

How to account for and claim the reduced rate of VAT

To account for and reclaim the reduced rate of VAT, businesses must provide relevant proof of eligibility for the reduced rate.

This can include, but is not limited to:

• Invoices
• Delivery notes
• Other documentation

Businesses must also keep a record of the reduced rate of VAT they’ve charged and the amount they’ve reclaimed. This record must be kept in a format that’s easily retrievable and available for inspection.

Once the reduced rate of VAT has been applied, businesses must reclaim the reduced rate of VAT on their returns. The amount and the rate of VAT reclaimed must be clearly stated on the returns.

In the event that a business has been overcharged or has not been able to reclaim the reduced rate of VAT, it’s their responsibility to take the necessary steps to recover the amount from the Tax Authority.

Pleo can help you keep track of your VAT

Our automated invoice software helps you retain all the evidence you need to pay VAT or show that you’ve accurately reversed it. You can even integrate it with your accounting system of choice, from Sage to Quickbooks.

Pretty cool, right? We think so, too.

Try automating your invoices with Pleo today.