The New Hospitality Industry VAT Rate

From October 2021 there will be a temporary VAT rate of 12.5% introduced to the hospitality industry. This will be the 4th rate of VAT between the 1st October 2021 – 31st March 2022.

It’s the first time since 1979 we will have so many tax rates to handle, beaten by the Italians who have 5!

What changes have there been?

To help with the struggles of the pandemic, many hospitality supplies were given a reduced VAT rate from 20% to 5% from the 15th July 2020, on sales made and purchases from the hospitality, accommodation and attractions industry. Originally, this reduction was meant to end on the 13th January 2021, but was extended to the 31st March and then 30th September 2021.

What is the new tax rate?

The new 12.5% rate will replace the reduced VAT rate of 5% that many hospitality supplies have had since July 2020.

How long will the rate be 12.5%?

Currently, the temporary rate will run until the 31st March 2022 – 2 years from the initial reduction.

Do I have to do anything?

You might have to update any e-POS, booking or cloud accounting software you use, to ensure the new VAT rate is applied to the relevant products and services.

You will also need to make sure you manually input the right sales data into any software or records you keep.

Remember to update any bank rules and ensure you select the 12.5% VAT rate before reconciling transactions.

How to update the VAT rate in Xero

In your Xero account go to Accounting > Advances > Tax Rates.
Click New Tax Rate and enter the Tax Rate Display Name ‘12.5% (VAT on Income)’. Make sure the Tax Type is set to Sales.
Change the Tax Component from 0% to 12.5% and press save.

If you also purchase from the hospitality sector, make sure to set up a new tax rate with the display name ‘12.5% (VAT on Expenses), with the tax type Purchases too