The UK’s six-month VAT reduction: pass it on?
Should UK visitor attractions and cultural organisations pass on the temporary VAT cut to audiences and visitors?
The UK government have announced a six-month cut to the VAT rate, from 20% to 5% for some supplies and sectors.
The reduced rate of VAT will apply to supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises across the UK as well as to accommodation, and admission to attractions.
The Secretary of State for Culture, Media and Sport confirmed in the hours following the Chancellor’s statement that the definition of attractions includes “Shows, Theatres, Circuses, Fairs, Amusement Parks, Concerts, Museums, Zoos, Cinemas & Exhibitions.” At the time of writing it is not yet clear whether the scope of the reduction includes trading subsidiary companies.
Our expectation is that the change is due to take effect for transactions paid for from (or ticket / F&B invoices issued from) Wednesday 15 July 2020 and will last until 12 January 2021 – though the full details of tax points will be confirmed in HMRC guidance.
The financial impact
Taking a VAT-able £25 ticket as an example, whereas under the current rate £4.17 would currently be remitted to the Treasury in VAT, under the new 5% rate this would drop to £1.19 – a difference of £2.98.
Our understanding is that the VAT rate for common transactions in our sectors will be:
- Admissions – 5%
- Food & Beverage (not alcohol) – 5% or 0% (depending on the goods)
- Alcohol – 20%
- Memberships – 20% (unless the membership transaction is a donation)
- Retail / merchandise- 20%
- Hires – 20%
If your Finance Director is reading this, they may already want a lie down – as may the teams responsible for configuring ticketing and POS systems!
Separate rules also apply for bundling meaning that if, for example, the price of admission includes a bundled alcoholic drink, then in those circumstances the alcohol could be sold at 5% VAT – but we believe that this would have to be included in the face value admission price, and would not cover a bundle sold as a ‘cross sell’ during the sales process. More on this on the HMRC website.
The not-so-great news
For the many attractions and venues who already qualify for the VAT cultural services exemption (including local authority-controlled organisations, and other non-profits), admissions are already exempt from VAT and so there will be no reduction in VAT on tickets from which to benefit.
Similarly, any organisation which franchises out catering under a deal based on turnover rather than a calculation of profit is also unlikely to see any direct benefit as a result of this change – and in the event the franchisee chooses to lower prices without seeing a resulting increase in trade, the franchiser could even see an additional decrease.
For the very small minority in the sector to which it applies, Corporation Tax may also be a factor – while many performing arts organisations for example are likely to see greatly reduced profitability this year, higher than expected ticket income could affect the Corporation Tax bill due in the financial year when the performances mature. As a larger Corporation Tax bill implies greater profitability, this is in some ways a good ‘problem’ to have.
Should the reduction be passed on to purchasers?
For those who do qualify, and who control verticals including food & beverage sales, the VAT reduction is potentially very good news.
The big question is whether or not to pass on the reduction to purchasers, or to retain the difference as a contribution towards the revenue loss caused by socially distanced operation.
Audience sentiment tracking surveys, including Indigo’s After the Interval, have shown that where people are unwilling to book tickets or attend attractions right now, they are mainly concerned for their personal health and safety.
This begs the question – if price isn’t the reason holding some people back from visiting, is lowering prices the right solution?
Indeed, at a time of reduced capacity and depleted reserves, organisations could feel under pressure maximise revenue – while maintaining a range of prices to ensure they remain accessible to the widest possible audience or visitor base. A Triple A approach encourages you to consider how price changes in one area can affect income generated in other areas.
Every organisation will be different, and there is no hard and fast rule on whether to pass on the VAT reduction – but here are some questions you may want to weigh, to find your answer.
Single ticket prices
- What is your average transaction value for tickets? Would passing on the temporary VAT reduction lower this to a point that could genuinely stimulate additional demand? To answer this you will ideally know the price sensitivity of your market. Small discounts on tickets such as “10% off” rarely generate the volume of additional purchases hoped for – but can sometimes be effective if the reduction drops prices below a psychological price threshold.
- If lowering prices would increase demand, do you have the capacity to accommodate that demand? If you are already running at or close to capacity, what is gained from cutting prices?
- If choosing to lower prices, can you update your price presentation to make the purchaser aware that the reduction is temporary, avoiding a perception of price increase in January 2021?
- Could you retain face value prices but target a discount of equivalent value to the VAT reduction for customers with lower ability or willingness to pay– This could be reflected in targeted concessions or, for example, by inviting those purchasers to join a membership which could be part of your strategic discounting mix in the future?
Donations & memberships
- What message does passing on the reduction communicate about your organisation’s financial position? Could reducing prices undermine your case for donation support – if you can seemingly afford to pass on the discount, purchasers may perceive you don’t need further support. Could reducing the price of single tickets devalue a membership which includes ticket discounts?
- If your donation conversion rates are low, could it be worth asking purchasers to convert the difference in VAT into a donation, which may additionally be eligible for Gift Aid? This comes with a warning that for organisations with healthy conversion rates, this tactic could lower your average donation by anchoring the suggested donation amount lower than it already is.
Food & Beverage
- In light of the 5% VAT rate on food & non-alcoholic drink, combined with the Eat Out to Help Out scheme (subject to eligibility), could reducing prices in this area drive an increase conversion rates for food & beverage – and what proportion of this income do you retain if so? Do you have sufficient capacity to accommodate greater demand for food & beverage? Can you create that capacity?
Future booking behaviour
- Has your organisation been encouraging consumers to buy tickets in advance? If so, could lowering prices now penalise the people who bought early, and discourage them from booking early in the future?
- If you choose to not lower prices, and retain the additional income during this period, can you incentivise purchasers to return, by issuing a voucher of equivalent value to the VAT reduction, to be applied against a future transaction?
- If choosing to lower prices, can you extend your advance booking inventory so that more purchases benefit from the VAT reduction? Most sentiment tracking surveys indicate that many ticket purchasers feel increased confidence around booking into 2021.
This short summary is designed to help organisations work through decision making regarding the VAT reduction – we recommend checking the HMRC website for official information and seeking professional advice on your specific circumstances.
Our Price Sensitivity Analysis provides the clearest picture of what audiences and visitors are willing to pay and helps to answer many of these questions, including which of the levers that you control are most effective at generating additional demand.