Restaurant businesses which issue vouchers could be due a potential cash lifeline following the changes in VAT treatment

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By Stuart Clark


For business people and their professional advisers, it is like trying to navigate a pathway on constantly shifting sands at the moment, as new – and generally well-intentioned – regulations come into play in response to the fluid nature of the ongoing pandemic.


For instance, an announcement at 7pm on Friday of the detailed guidance about the renewed job support scheme was followed at 7pm on Saturday by the news of the lockdown and furlough extension, which overrode the job support scheme announced just 24 hours earlier.


Similarly, when VAT for the hospitality sector was cut from 20% to 5% in July, it was very welcome, although it caused much consternation about who and what qualified. VAT regulations are Byzantine at the best of times, with continual exceptions to the rule – and exceptions to exceptions – but these required closer scrutiny than usual by even the most accomplished experts.


Just to complicate matters for restaurant owners, the rules on vouchers – which many have embraced enthusiastically as a means of increasing footfall and discretionary spend – are also affected by the temporary VAT changes, as is the timing of tax payment to HMRC.


But while this is a complex issue, it presents an opportunity for business owners to reclaim potentially many thousands of pounds, which could be a lifeline at times like these. In light of this, we are writing to all our clients in this category with immediate effect.


Before the rules changed in the summer, it depended what kind of voucher the restaurant sold. If it knew VAT was eligible at 20%, it was a Single Purpose Voucher (SPV), and on a face value of £120, £20 would be payable to the Revenue as soon as it was sold.


After the change, customers could use the voucher to buy food, now rated at 5%, as well as alcoholic drinks, still rated at 20%, and so the voucher becomes a Multi-Purpose Voucher (MPV) – and the tax point is when they are used in lieu of cash.


In effect, since July, there is no requirement to pay the tax cash across immediately on gift vouchers as these are now multi purpose vouchers, however there is more to it than that.


There are three elements to consider:


  • If a business owner has sold new vouchers from July 15, these are now MPVs, with no immediate VAT liability.


  • If a voucher sold before July 15 is redeemed, then the VAT can be unwound from 20% to 5% (assuming it wasn’t spent on alcohol).


  • VAT on vouchers still outstanding but which have not been used because of lack of opportunity – i.e. restaurants being closed – could potentially be reclaimed.


As an example, if a restaurant had sold £50,000 in vouchers, which is not a remarkable amount, it would have paid VAT on them at 20%, amounting to £8,333. If these vouchers were redeemed on food and non-alcoholic drinks then the VAT should only be at 5% rather than at 20%. The VAT should therefore have only been £2,380, saving the restaurant in the region of £6,000.


Some commentators have argued that savings of this nature should be passed on to the consumer, and indeed some high-profile operators such as Pret A Manger and Nando’s have done so, but this is a quite misguided point of view.


The end user in the sector has already benefited to the tune of £522 million through another Government initiative, Eat Out to Help Out, which saw diners claim 100 million cut-price meals in the summer.


The VAT change was specifically designed to benefit restaurants, and the hospitality sector generally, as they dealt with dramatically decreased footfall, increased running costs such as electricity and training, and exceptional costs such as sanitising, PPE and distancing infrastructure.


The current reduction in VAT is destined at the moment to end on 31st March, 2021, but no one without a fully functional crystal ball has any idea what next year will bring and how the government will respond to the circumstances at the time.


The cut could be extended, meaning vouchers would remain multi-purpose. Or it could revert to pre-July rules. No one knows.


The one thing we can be sure about is that businesses will need expert advice and guidance from professional advisers who deal with this sort of complexity every day – and who are on their side.


Stuart Clark is Managing Director at Russell & Russell Business Advisers, based in Glasgow.