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The reduced rate of VAT has gone up - have you factored it in?

The reduced rate of VAT has gone up - have you factored it in?
Wednesday, December 15, 2021

The 5% reduced rate of value-added tax (VAT) has been in place since 8 July 2020. The reduced rate has been extended on numerous occasions to factor in changes to the affected sectors over the course of the pandemic – and has been a lifeline for many affected companies.

But, from 1 October 2021, the 5% rate jumped to a new reduced rate of 12.5%, a change that could have significant cashflow implications if you’re one of the affected businesses.

Why was the reduced rate of VAT needed?

The hospitality, hotel and holiday accommodation sectors have been particularly badly hit by the impact of the Covid-19 pandemic. Many businesses saw huge drops in sales and predicted revenues as the effects of lockdown began to hit at the start of 2020 – and this put some businesses from the most badly affected sectors in real financial jeopardy.

  • To help combat the cashflow issues caused by a sudden unpredicted drop in income, the Government introduced a reduced rate of VAT for certain supplies in the hospitality, hotel and holiday accommodation industries. 
  • Businesses in these specific sectors would only charge VAT at 5% on their affected sales (note: some items are unaffected), rather than the usual 20% standard rate of VAT. 
  • This meant hotels, restaurants and cafes could keep their selling prices the same, but because the VAT included was lower, keep more of the income in the business.

How will the new 12.5% reduced rate affect my cashflow?

Your hospitality or hotel business will have benefited financially from this reduced rate. But now you’re now faced with accounting for 12.5% VAT between 1 October 2021 and 31 March 2022. And then, from April 2022 onwards, reverting to the standard 20% rate of VAT for all the relevant sales.

This is a significant change in your cashflow position and something to factor into your financial planning for the end of Q4 2021 and into Q1 2022. For example:

Your hospitality or hotel business will have benefited financially from this reduced rate. But now you’re now faced with accounting for 12.5% VAT between 1 October 2021 and 31 March 2022. And then, from April 2022 onwards, reverting to the standard 20% rate of VAT for the relevant sales.

This is a significant change in your cashflow position and something to factor into your financial planning for the end of Q4 2021 and into Q1 2022. For example:

  • Run forecasts to account for the VAT rate increases – using your historic sales information, it’s possible to run projections and forecasts to see how the jump in the VAT rate to 12.5% will affect your net revenues now, and the further impact it will have when the rate goes back up to 20% in April 2022.
  • Review your working capital position – As the economy continues to recover from the pandemic, now is a sensible time to reforecast your entire cashflow and working capital position to take the current situation into account. The more detailed your projections, the more insight you’ll have into the impact on your cash position.
  • Assess whether external funding is needed – if cashflow is still poor and working capital is projected to be reduced over 2022, the business may need to consider new routes to additional external finance. This means sourcing the right lenders, deciding on the most appropriate financial products and having the numbers, reporting and guarantees required for a finance application.

Talk to us about the impact of this change on your business

Being your tax adviser means more than just submitting the VAT return. As your accountant, we can also help you to forecast the short, medium and longer-term impacts of this increase in the reduced rate of VAT. And, if cash is needed, we can help search for external finance as well.

Talk to us about how the VAT increase will affect you and how we can help you strengthen your working capital and enhance your cashflow management.

 

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We found Panthera via our search for a Xero expert. We knew the software we wanted to use, and needed a forward-thinking accountancy partner who could get us up and running, and teach us the ropes moving forward. Tory and her team have always been on hand to answer our questions, and help us to grow as a business, particularly during periods of big change, such as becoming VAT registered. They are always on hand to alleviate any concerns and help to keep our records in order, which makes our year-end accounts an absolute breeze! Being based in Bristol, our relationship is entirely email based, alongside one consolidation meeting at year end - this keeps things simple, efficient and most importantly, hassle-free.

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The whole team at Panthera are great! Working with them has been a huge support to my growing business. They help me to understand the numbers I need to know. They give me technology solutions like Xero so that I can process things quickly and have access to my own figures. They are quick to reply, highly knowledgeable, nothing is too much trouble and as well as making sure that everything is compliant and on time, they are enthusiastic, professional and fun to work with.

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I would like to say that Panthera Accounting have helped me with my business accounts for more than 4 years now. They have consistently offered an excellent competitively priced service that works both professionally and in such a friendly way that I would highly recommend them to everyone considering using their services.

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I had been with Mr Dunn for 20 years when upon his death Panthera took over the business. They now play a bigger part in the running of my business, they do all the stuff that has to be done but I don't like doing ie book keeping, VAT, wages, and returns. They are always there to answer queries and sort out issues and make sure all Tax deadlines are met. Their costs are fair, service is great and I have and would highly recommend them.

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Panthera Accounting have gone above and beyond the call of duty to guide and support our Company. They offer a professional, friendly and personal service that can take the stressful and sometimes frightening feelings out of running a business. They have guided us through the working of Xero and have offered “teaching sessions” on the day to day running of the accountancy package. Our only regret is that we didn’t join their team earlier.

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Panthera are fantastic. Always professional, going the extra mile for their clients and delivering superb service. I recommend them all the time to my clients.

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