What is VAT? ⚖️

On 15th July, the standard rate of VAT in the UK was reduced from 20% to 5% for businesses in the hospitality and tourism sector. This reduction is intended to reinvigorate the economy, offering a helping hand to businesses that have struggled as a result of the coronavirus lockdown 🤝

This sounds like great news... but what is VAT and how does this affect you?

VAT explained

VAT stands for ‘Value Added Tax’, and it’s universally applied to a variety of goods and services automatically.

In other words, it’s a consumption tax that’s paid directly to HMRC 💸 And because it’s an indirect tax, it may have slipped your attention previously, as it’s generally included in the final shelf price that we see as consumers.

The VAT rate is periodically adjusted, with the standard UK rate prior to this announcement standing at 20%.

At a rate of 20%, it means that if the purchase price for a pair of jeans is £30, then the amount of VAT you pay is £5, with just £25 going to the seller 🤑

What does the reduction in VAT mean for you?

Under the new system, restaurants, cinemas, hotels, and theatres will all see a reduction in the rate of VAT that they must pay to HMRC from the sale of certain items.

This could potentially mean that a standard 2D family Odeon cinema ticket usually costing £40 would now cost £35 🎟

What do you pay VAT on?

With these amendments aside, the price of most goods includes 20% VAT. But VAT can also be charged at a different rate, depending on how the purchase is categorised by HM Revenue & Customs.

The rules which define what you pay and do not pay VAT on can sometimes be a bit weird and wacky! For example, you pay 20% VAT on potato crisps (but not corn based snacks), hot takeaway (but not cold takeaway) and ice cream (but not on other frozen food) 🤷

The rate is reduced to 5% for sanitary towels and maternity products, mobility aids for the elderly, solar panels and children’s car seats.

There are a handful of items that are generally VAT exempt, such as postage stamps, children’s clothing and most food items... Jaffa Cakes included 🍰

Fun fact 💡

In 1991, McVities won a case against HMRC when they claimed Jaffa Cakes are in fact cakes and not biscuits. This ruling allows us to enjoy them with zero VAT to this day, and we all know that food tastes better when it’s cheaper 😋

What will you pay less VAT on now?

Under the new VAT system, the taxable sales from certain items will be reduced from 20% to 5%:

• food, non alcoholic beverages sold at eating establishments
• accommodation at hotels and hostels
• tickets to cultural attractions

This reduction in VAT return is expected to boost small businesses particularly hard hit by the Covid-19 imposed lockdown.

It is important to note that this new VAT scheme does not require businesses to pass over the benefits to their customers. Even though many businesses will be paying a reduced rate, prices may not be adjusted to reflect this.

Some but not all companies have decided to welcome their customers back by reducing their prices in line with the new rate of VAT.

To read about this in more detail check out gov.uk‌‌

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