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

Scratching your head over the prospect of reduced rate VAT?

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 VAT and how does it work?

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.

Another of those rules and regulations is described as the reduced rate of VAT.

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 in 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.

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 5% reduced VAT rate 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 2022 is back to 20%.

What goods and services fall under reduced rate VAT?

Though the hospitality VAT rate in 2022 is back to standard rates, some goods and services continue to be eligible for the reduced rate.

Take a look at our table to find out more, or hop over to the government’s website to see a full list of eligible goods and services.

Charities

• Energy-saving materials permanently installed in dwellings and buildings used for a relevant residential purpose providing the total cost of them (not including VAT) is not over 60% of the cost of the installation of the products (not including VAT)

Welfare

• Mobility aids for the elderly
• Smoking cessation products — nicotine patches and gum

Power

• Electricity for domestic and residential use or for non-business use by a charity
• Gas for domestic and residential use or for non-business use by a charity
• Heating oil for domestic and residential use or for non-business use by a charity
• Solid fuel for domestic and residential use or for non-business use by a charity

Installed goods

• Closed solid fuel fire cassettes
• Electric dual immersion water heaters with factory-insulated hot water tanks
• Electric storage heaters
• Gas-fired boilers
• Gas room heaters with thermostatic controls
• Oil-fired boilers
• Radiators
• The installation, repair and maintenance of a boiler, radiators, pipework and controls forming a central heating system (including micro combined heat and power systems)
• The installation, repair and maintenance of renewable source heating systems. This means space or water heating systems which use energy from: renewable sources, including solar, wind and hydroelectric power; or near renewable sources, including ground and air heat
• Connection or reconnection to the mains gas supply

Building and construction

• Converting existing premises by increasing the number of dwellings within the building
• Renovating a dwelling that has been empty for at least 2 years
• Protective and safety equipment

Protective and safety equipment

• Carrycots with restraint straps
• Children’s car seats, booster seats and booster cushions
• Children’s safety seats with bare wheeled framework

Food and drinks have other specific VAT rates 

It’s worth remembering that most food is eligible for zero rated for VAT which is why it doesn’t appear in this list. There are exceptions to this like takeaways and certain non-alcoholic drinks like soft drinks and mineral water that fall under standard VAT rates.

What conditions do I need to meet for these rates to apply?

The conditions 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 are provided
• How they are 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 are 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 is 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 already expired, businesses are required to charge the standard rate of VAT for any goods or services purchased.

If you’re 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, of 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.

What impact did reduced rate VAT have during COVID?

The reduced rate was designed to help businesses in the hospitality, holiday accommodation and attractions 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.

Some businesses have petitioned to extend the reduced rate to help industry fully recover from the COVID-19 pandemic and to combat the cost of living crisis in the UK.

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 have charged and the amount they have reclaimed. This record must be kept in a format that is 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 is 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 keeps 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? We think so too.

Try automating your invoices with Pleo today.