VAT reduction: When does the five per cent rate cut start?

VAT is being slashed for businesses in the tourism and hospitality industries.

But what's happening and what does it mean for households? Here's what you need to know.

⚠️ Read our coronavirus live blog for the latest news & updates

What is VAT and what is it changing to?

VAT (value added tax) will be cut from 20 per cent to five per cent for businesses in the hospitality and tourism industries, chancellor Rishi Sunak revealed in his mini-Budget on July 8.

VAT is a tax paid by businesses to HMRC on the items or services they sell.

It's typically passed on to consumers in the price they pay for these goods and services.

When will the VAT cut take force?

The tax cut will take force today (July 15) and will remain in place until January 12, 2021.

What will the VAT cut apply to?

Booze is excluded from the VAT cut, but it will apply to food and non-alcoholic drinks from restaurants, pubs, bars, cafés and other similar premises across the UK.

It will also apply to accommodation and on admission to attractions.  

Mr Sunak said: "VAT on hospitality and tourism is charged at 20 per cent. So I've decided, for the next six months, to cut VAT on food, accommodation and attractions.

"Eat-in or hot takeaway food from restaurants, cafes and pubs; accommodation in hotels, B&Bs, campsites and caravan sites; attractions like cinemas, theme parks and zoos; all these and more will see VAT reduced, from next Wednesday [July 15] until January 12, from 20 per cent to five per cent."

How much can I save from the VAT cut?

The Treasury says the VAT reduction is expected to save households around £160 a year on average and it will mean price cuts of 12.5 per cent if businesses pass it on in full.

We found you could save around £50 over six months if you spend £15 a week on takeaways, for example, meanwhile a family of four could save hundreds if they're planning a week's holiday in the UK.

But the caveat is whether businesses will pass on the savings to consumers.

Genevieve Morris, head of corporate tax at accountancy firm Blick Rothenberg said: "It’s now a case of watch and see whether it is the consumer that benefits or the businesses themselves.  

"The indication from the chancellor's statement is that he expects this to reduce prices and encourage spending.

"But many businesses that have huge losses over the past few months may use this to boost profits, by keeping headline consumer prices the same, and pocketing the VAT saving – and who can blame them if they did?”