The chancellor recently announced a temporary cut in the VAT rate from the standard 20% to the reduced rate of 5% for certain supplies in the hospitality and tourism sector. The aim of the change is to boost the economy and encourage consumer spending in the sector.

We’re pleased to say that we’ve already got the product capabilities to apply these changes in Xero – read on to find out more about the VAT changes coming through and how to apply these in Xero.

Key changes announced

• Temporary VAT cut for food and non-alcoholic drinks from 15 July 2020 to 12 January 2021 to support businesses and jobs in the hospitality sector. The 5% rate of VAT will apply to supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises across the UK.
• Temporary VAT cut for accommodation and attractions from 15 July 2020 to 12 January 2021 to support businesses and jobs. The 5% rate of VAT will apply to supplies of accommodation and admission to attractions across the UK.

Further guidance on the scope of this relief will be published by HMRC in the coming days – please keep checking the gov.uk website for more updates.

How to apply the VAT cut in Xero

For most of you, the reduced 5% VAT rate is already available in Xero as shown below – all you need to do is select the appropriate VAT rate for affected supplies as instructed by HMRC from 15 July. More information can be found in our support article.

If these rates don’t appear in your Xero account, or if you prefer to identify the 5% VAT rate for hospitality, then you can easily create them. Simply follow these instructions to add a new tax rate.

How to set up default VAT rates in Xero

To save you time on applying the reduced 5% VAT rate for every transaction, Xero enables you to set up default rates. You may wish to change the following areas:

• Chart of accounts
• Customer and supplier contacts
• Products and services
• Bank rules
• Repeating invoice templates

If you have any questions about which areas you should update, please contact your accountant or Xero support. You can also check out our support article for more information about creating and accessing your cases.

Lastly, if you’re a business using different software products such as hospitality products that integrate with Xero, please check if they’ve got capabilities to deal with reduced VAT sales and purchases.

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