The recent announcement by the Chancellor of a temporary VAT rate cut to 5% for children’s meals, tickets and family attractions over the summer holiday period certainly captured the national news headlines. It will have a direct impact on the hospitality sector and on commercial operators of visitor attractions. However, there is plenty more going on in the VAT world for other types of business even if it doesn’t get the same level of headline coverage.
VAT rate cut for summer
The legislation has now been published for the temporary VAT rate cut from 20% to 5% and there is a bit more to consider once you get beyond the headlines.
The reduced rate will apply from 25 June to 1 September 2026 to:
- Certain supplies of children’s meals.
- Children’s admission to theatres, cinemas, concerts, exhibitions, shows and cultural attractions.
- All admission tickets to certain attractions suitable for families with children (such as amusement parks and soft play centres).
Any business affected by this change will of course need to get into the detail, which includes matters such as making VAT adjustments for pre-sold tickets. At a high level then in terms of the meals, they must be clearly held out for sale only as a meal for children, as part of an on-premises catering supply. Though there doesn’t seem to be anything to prevent an adult purchasing a reduced-rate children’s meal – or several of them.
The guidance on tickets for admission to cinemas and theatres seems fairly straightforward. It is interesting to note that for family tickets that include children, the reduced rate applies to the whole ticket including any adult admissions within that package. The VAT relief for family-themed attractions seems clearly directed at commercial operators since a sizeable number of museums and galleries offer free admission to the public and already enjoy VAT refunds on their operating costs under a special scheme. Admission charges for sports events and facilities falls outside the relief.
The big question about all this is whether the VAT saving will get passed on to the consumer in the form of reduced prices, as is suggested by government. Or will the suppliers in question keep their prices the same and use the VAT saving to improve their margins? Recent news headlines have also reflected strong lobbying by the hospitality sector for a VAT rate cut for restaurant meals, to help struggling businesses.
There was a temporary VAT rate cut to 5% a few years ago in the immediate post-Covid lockdown period and the general feeling was that this acted as support for a struggling hospitality sector rather than producing price reductions for consumers. We shall have to see what happens over this summer.
Input claims in HMRC’s crosshairs
HMRC seems to have a real focus on input tax claims, with a raft of cases coming through the courts over the last six months as a result of HMRC challenges. Broadly, these fall into two main strands.
One aspect is where HMRC says the purchase invoice is inadequate or where it is missing and HMRC refuses to exercise their discretion to allow alternative evidence. HMRC is not always successful in these cases. However, the process of challenging a VAT assessment can be arduous and costly and the learning point is to ensure that purchase records are robust.
The other significant strand is where HMRC is challenging reclaims of import VAT. The assessments here can often involve very significant amounts of VAT. Broadly speaking, following an immediate post-Brexit period of adopting a ‘light touch’ approach to imports and exports we are now seeing the results of HMRC focusing on the documentation and key principles to challenge taxpayers. The Courts have supported HMRC’s position that the only person entitled to claim the import VAT as input tax is the owner of the goods and the value of the goods must be a cost-component of the importer’s onward supply. Longstanding commercial arrangements where a business imports goods on behalf of an overseas customer, often when goods are brought in for processing or repair, are being successfully challenged by HMRC and the VAT deduction is being disallowed. In situations like this HMRC is making the point that alternative customs procedures need to be used to avoid creating a sticking VAT cost.
Clock ticking on e-invoicing
The government is clearly keen to press ahead with a national scheme for electronic invoicing – the digital exchange of information directly between the financial systems of the supplier and the customer. This is driven by a desire to reduce VAT errors, improve compliance and reduce opportunities for fraud, thereby boosting economic growth. We now know that e-invoicing is to be mandatory for all VAT invoices from April 2029. A more detailed ‘roadmap’ is expected later this year setting out how matters will operate in practice.
One of the practical hurdles for smaller businesses appears to be a lack of awareness, as HMRC’s own research suggests that a significant proportion of SMEs incorrectly equate e-invoicing with sending out invoices as an email attachment. One challenge for any business will be to ensure that all its customers and suppliers are geared up for e-invoicing, hence actions can be taken now – such as cleansing data and engaging with stakeholders - rather than leave such tasks to the last minute.
Final thoughts
To close, a further thought on the temporary VAT rate cut. Based on past experience we might see some imaginative attempts to ‘push the envelope’ with this VAT relief. One favourite example comes to mind. That post-lockdown era temporary VAT rate cut was followed by a VAT Tribunal decision (The Young Driver Training Limited v HMRC) where the taxpayer was unsuccessful in arguing that their supplies of instructor-led driving experiences for under-17s on private land was akin to charging admission to a funfair. The Tribunal wryly observed that teaching youngsters to drive safely and avoid crashing was not quite the same thing as taking a ride on the dodgems!
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