A heads up for hospitality vat returns to 20% today 010422

The hospitality sector has enjoyed a temporary reprieve from the standard 17.5% VAT rate since March 2020, but as of 1 April 2022, that relief comes to an end. If you’re running a hotel, restaurant, pub, café or catering business in the Midlands or beyond, it’s crucial to understand what this change means for your VAT returns and your bottom line. We’ve put together this guide to help you navigate the transition smoothly.

What’s changing and when?

From 1 April 2022, the reduced VAT rate of 5% that has applied to hospitality supplies expires, and the standard rate of 20% returns. This affects supplies of food and beverages consumed on the premises, as well as holiday accommodation. If you’ve been charging customers 5% VAT on your takings, you’ll now need to charge 20%.

For VAT return purposes, this means your first VAT return covering the period after 31 March 2022 will reflect this increase. If you file monthly, your April 2022 return will be the first to include transactions at 20%. Quarterly filers will see the change reflected in their April–June 2022 return.

How this affects your VAT calculations

The uplift from 5% to 20% is significant, and it’s essential to get your VAT accounting right from day one. Let’s walk through the practical impact:

Output tax (VAT you charge customers): Your turnover will now attract VAT at 20% rather than 5%. On a £100 sale, you’ll now account for £20 VAT instead of £5. This £15 difference per transaction adds up quickly across a busy week.

Input tax (VAT you reclaim): The good news is that your ability to reclaim VAT on genuine business expenses doesn’t change. You can still reclaim the full VAT on supplies such as food, drink, utilities, staff uniforms and kitchen equipment, provided they’re used for your business and you have valid VAT invoices.

Net VAT position: The difference between output tax and input tax is what you owe to HMRC (or claim back, if input tax exceeds output tax). The rate change will likely increase your net VAT liability significantly. Make sure your cash flow forecasts account for this.

Practical steps to take now

Update your systems: If you use electronic point-of-sale (EPOS) systems or accounting software, ensure the VAT rates are correctly configured before 1 April. A simple mistake here could result in undercharging VAT and a shortfall when HMRC reviews your return.

Communicate with customers: Consider whether you need to notify regular customers, contract holders or loyalty scheme members about price increases. Transparency helps manage expectations and protects your reputation.

Review your pricing strategy: You may wish to absorb some of the VAT increase, pass it fully to customers, or find a middle ground. This is a business decision, but do factor it into your financial planning.

Check your VAT threshold: If your turnover is approaching or exceeding the VAT registration threshold (currently £85,000 for the 2021/22 tax year), be aware that the VAT you charge customers will now increase your recorded turnover, which may push you over the limit sooner than expected.

Document everything: Ensure your invoices, receipts and VAT records are crystal clear. Keep copies of all sales documentation showing the date and the VAT rate applied. This is vital should HMRC enquire into your returns.

Planning ahead

The VAT increase is permanent, so this isn’t a temporary blip. It’s worth reviewing your profit margins and operating costs to see where efficiencies can be made. Some hospitality businesses may also wish to consider whether they’re claiming all available VAT reliefs—for instance, if you provide catering for business events, certain supplies may still benefit from specific VAT treatment.

If you’re unsure about your VAT obligations, your VAT return deadlines, or how to correct any errors from the transition period, now is the time to seek professional guidance. Getting it right from the start saves stress and potential penalties later.

Conclusion

The return to the standard 20% VAT rate marks a significant moment for the hospitality sector. By understanding the mechanics of the change, updating your systems, and planning ahead, you can manage the transition confidently. VAT compliance needn’t be complicated, but it does require attention to detail.

For tailored advice, contact Severn Accounting — we’re here to help.