Use the reduce rate VAT to rebuild your cashflow

5% VAT - how to reap the benefits

Jul 10, 2020 7:55:51 PM / by Veral Desai

£5,400 extra cash! The 5%VAT can help your business cashflow!Rishi Sunak to the rescue, finally some good news that brings confidence to hospitality operators and consumers alike.

The 5% VAT applies from 15 Jul 2020 to 12 Jan 2021, giving restaurants, take-aways, hotels and attractions a 6 month period of trading at a reduced VAT rate. This will be a critical tool during the critical winter months when dining out, autumn holidays and Christmas parties usually keep restaurants full and busy.


Bear in mind the new rate does not apply to alcoholic beverages.


So, how does this work out? Here's a simple illustration.


An average cup of coffee in London sells for £2.50 including VAT.

At 20% you collect £0.42 of VAT and that goes towards your quarterly VAT balance.

At 5% you collect £0.12 of VAT and that goes towards your quarterly VAT balance.

The difference of £0.30 remains with you. Your customer still pays the same (unless you want to pass on the saving and reduce menu prices)



Sell at £2.50 VAT incl. £0.12 (1)



If you sell an average of 100 coffee's a day, that's around 18,000 coffee's over reduced rate period which works out to £5,400!


Now factor in all the other food and drinks you sell on your menu. The collections can be significant and will definitely help your cash flow.


If you decide to fix the price, your customer still pays £2.50 for the same coffee and you benefit from the extra 'cash' that you hold on to. If you decide to reduce your prices to help attract customers, you may not see the benefit but could increase diner loyalty.


Overall, this is a short term fix to help increase consumer spend and allow businesses to maintain a healthy cash flow. This helps pay the bills and salaries while reducing dependency on government aid.


Please note that this article is not intended as business advice. It is simply my opinion and the figures are illustrative only. Each business should make their own decision from professional advice.

Tags: restaurants, hospitality, chef, cocktail, sommelier, bars, vat

Veral Desai

Written by Veral Desai