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What you need to know about the 5% reduced VAT rate?

October 20 2020 by Gayatri Wood

Who does the 5% reduced VAT rate apply to?

The reduced VAT rate only applies to certain supplies in the hospitality industry, hotel and holiday accommodation and also admission to certain attractions.

When does it apply?

It applies from the 15th July 2020 to 12th January 2021.

The details:

On 8 July 2020, the government announced that it would introduce a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions.

This cut in the VAT rate from the standard rate of 20% down to 5% will have effect from 15 July 2020 to 12 January 2021.

The following supplies will benefit from the temporary 5% reduced rate of VAT:

  • Food and non-alcoholic beverages sold for on-premises consumption. For example: in restaurants, cafes, and pubs
  • Hot takeaway food and hot takeaway non-alcoholic beverages
  • Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities
  • Admissions to the following attractions that are not already eligible for the cultural VAT exemption such as:
    • theatres
    • circuses
    • fairs
    • amusement parks
    • concerts
    • museums
    • zoos
    • cinemas
    • exhibitions
    • similar cultural events and facilities
What happens if you’re using the Flat rate scheme?

Anyone currently using the flat rate scheme needs to be aware that some of the % used has reduced to be in line with the reduction to 5%.

How to account for the reduced VAT rate in Xero

Most Xero accounts will already have a 5% VAT rate set up as this is a rate already in use for other supplies. If you need to set up a new VAT rate in Xero you can follow these steps:

  1. In the Accounting menu, select Advanced, then click Tax rates.
  2. Click New Tax Rate.
  3. Enter a display name and select a tax type.
  4. Add the tax component name and enter the VAT percentage.
  5. Click Save.
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