VAT cut is not for you

Hotels and meals out may not be cheaper despite the tax being slashed to 5%, says Paul Lewis

Luxury hotel Chef showing food under Low-key lighting

On 15 July the rate of VAT charged by restaurants, attractions and hotels was temporarily slashed from 20% to 5%. But within hours of the change coming into force, some firms were saying they wouldn’t be passing on the tax cut to customers through lower prices.  We have suffered enough from Covid-19, the message seemed to be, we need this income to help rebuild our business.

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If you paid £12 for a fast-food meal in June, then today, with the VAT slashed, that should cost you £10.50 (the net price is £10, so 5% VAT is 50p). That’s a price cut of 12.5% (not 15% as some newspapers have reported), but there is no compulsion on firms to pass it on.  They can still charge you £12 and pay 5% VAT and keep the other £1.43 for themselves (the new net price is therefore £12 minus 5% VAT = £11.43) – effectively putting up their prices by 14.3%.

What should happen is that tax-inclusive prices fall by 12.5% (oneeighth). So an £80-a-night room in a hotel should now cost £70. The sad truth is that no business has to pass on the tax cut and most people probably won’t notice because prices in the UK are shown inclusive of VAT. When you pay £120 for a hotel room, you don’t realise that £100 goes to the hotel and £20 to the Chancellor of the Exchequer, Rishi Sunak.

The VAT cut will end on 12 January 2021. But what if your holiday is coming up and you paid for it all last June? Normally VAT is charged at the point you pay – so you were correctly charged at 20%.  However, there is a special rule that allows firms to change what is called the taxpoint to the time you actually take the holiday. So they could refund you the extra VAT.

It’s a hassle and I don’t expect many firms to do it, but it’s worth asking. If you paid the deposit before the change and the balance after, the balance should definitely
be charged at the new tax rate – if the firm is willing to pass it on.

Paul Lewis presents Money Box on R4

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