Severn Accounting
Tax & Accounting

New reduced rate of vat for hospitality and leisure

By Ali Jaw ·

The hospitality and leisure sector has long been a vital part of the UK economy, particularly here in the West Midlands where tourism and local dining destinations contribute significantly to our communities. However, businesses operating within this space have traditionally faced substantial tax burdens. The reduced rate of VAT for hospitality and leisure represents a welcome relief for many operators, and understanding how it applies to your business is crucial for maximising cash flow and remaining compliant with HMRC regulations.

What is the Reduced VAT Rate and Who Qualifies?

From 1 April 2022, the government temporarily reduced the VAT rate on hospitality and leisure services from the standard 20% to 5%. This reduced rate has been extended several times and remains in place, applying to specific activities within the sector. The eligible services include:

  • Accommodation provided by hotels, guest houses, and holiday lettings
  • Food and drink supplied by restaurants, cafés, pubs, and takeaways
  • Admission to cinemas, museums, galleries, theatres, and sports facilities
  • Leisure facility usage, including gyms and swimming pools

It’s important to note that the reduced rate applies to the supply of these services themselves. Ancillary items—such as alcohol in some cases and certain other goods—may still be subject to standard rate VAT or exemptions, so careful attention to the nature of each supply is essential.

Practical Application for Your Business

If you operate within the hospitality or leisure sector, the application of this reduced rate should be straightforward in most cases. When you invoice customers, you’ll charge 5% VAT rather than 20% on eligible supplies. This immediately improves your pricing competitiveness and can help maintain customer spending power during challenging trading periods.

However, there are important nuances. For businesses offering mixed supplies—for example, a hotel that provides conference facilities alongside accommodation—you must correctly categorise each element. Accommodation benefits from the reduced rate, whilst some conferencing services might not. Similarly, pubs selling both food and alcohol must apply the correct rate to each: food typically qualifies, but alcoholic drinks may be subject to different rules depending on the specific circumstances.

Your VAT return process remains the same, but accuracy is paramount. Record your supplies carefully, distinguishing between those at 5% and those at 20%. Most modern accounting software, including cloud-based systems, can be configured to handle this automatically, reducing the risk of costly errors. If you’re uncertain about how to categorise particular supplies, it’s worth seeking clarification from HMRC or consulting your accountant before submitting returns.

Cash Flow and Record-Keeping Considerations

One of the most significant practical benefits of the reduced VAT rate is its positive impact on cash flow. Charging 5% instead of 20% means you retain more money within the business, which can be reinvested in operations, staff wages, or refurbishment projects. However, don’t forget that you’ll still account for this VAT on your quarterly or monthly returns and remit it to HMRC accordingly.

Robust record-keeping is essential. Maintain clear documentation of all supplies subject to the reduced rate, ensuring your VAT records align with your income records. This protects you in the event of an HMRC inspection and demonstrates good faith compliance. If you’re currently using manual invoicing systems, now is an excellent time to consider upgrading to software that automates VAT calculations and record-keeping.

Additionally, if your business turnover exceeds the VAT threshold (£85,000 as of the 2024/25 tax year), you must be registered for VAT. Conversely, if you’re eligible to use the flat rate scheme or another simplified VAT method, the reduced rate may affect your calculations, so review your scheme’s rules carefully.

Looking Ahead

Whilst the reduced VAT rate remains in place, it’s worth noting that government support measures can change. Keeping abreast of HMRC updates and any changes to eligibility criteria will help you plan your business finances effectively and adjust your pricing strategy if necessary.

The reduced VAT rate has provided meaningful support to the hospitality and leisure sector during a period of significant challenge. If you haven’t already reviewed how this applies to your specific business model, now is the time to do so. Correct application ensures you benefit fully whilst maintaining full compliance.

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