It comes as no surprise that the hospitality and tourism sectors have been hit the hardest during covid-19. These last three months have truly tested the industry, which has suffered significantly with cash flow problems and cash deficit issues. This is a sector that needed government backing to save it from collapsing. In fact, a recent report by Sage – “Survival, Resilience and Growth”, found that only 28% of SMEs in hospitality expect to profitable by June 2020 and 44% on average are prepared to deal with future cash flow problems if a second wave were to occur.

With that said, there has been some relief for the sector, as we welcomed the Chancellor’s recent announcement to reduce the rate of VAT to 5% for hospitality, holiday accommodation and attractions for six months. Combined with the Eat Out to Help Out Scheme (EOHOS) this move is sure to stimulate spending, which will in turn assist much needed growth in the UK economy.

Businesses that sell food and drinks, provide accommodation or manage attractions will however need to update their software for these changes in VAT and it is crucial that these are administered with as little disruption as possible for businesses who have already faced significant challenges over recent months.

The right foundations to support VAT cuts

Measures that support and help bolster the SME community are always welcome; however, we need to ensure that these businesses acknowledge the need to have the right digital foundations in place to release the burden of some of the tasks that will remain, and in some areas are more complexed.

Irrelevant of the financial relief a fiscal cut will have, HMRC will still require that all VAT-registered companies file their tax returns and keep a digital record of payments and transactions.

VAT is an area with many complexities, for example bread rolls normally have no VAT (technically they are zero rated).  However, when a bread roll is served as part of a hot meal such as a burger, it becomes standard rated and subject to 20% VAT.  Under the recent changes, if the burger is now sold as part of a hot takeaway meal it becomes reduced rated and if served as part of a hot eat-in meal, it is even eligible for the EOHOS voucher scheme.  Overwhelmed business owners and finance teams within the hospitality, holiday accommodation and attractions sectors will need the time and advice to adapt to new reporting requirements. Complexity will only be magnified if rate reclassifications are implemented or eased off gradually.

In an environment where businesses are juggling a range of fluctuating VAT rates, it’s all too easy for mistakes to creep in. Wrong rates may be applied to a transaction, invalidating its calculations or creating costly delays that could mean it misses its deadline. If a company’s data is siloed and disparate, it even runs the risk of having several conflicting policies at once.

It is essential that all businesses in the relevant sectors now work with their advisers and accountants to understand the changes needed, while ensuring that during this transition, they keep a close eye on their cashflow and adapt forecasts accordingly given the increased risk for incorrect VAT amounts to be accidently invoiced and paid.

Making VAT digital

SMEs within the hospitality and tourism sectors can chart a safe path through the complexity of VAT rate changes, but only by building digitisation into their reporting processes. We know through our research that smaller businesses have a growing appreciation for new technology, for instance, 70% expect technology to play a key role in their recovery from the impacts of covid-19.

Using cloud-based tax software is the safest and most efficient way to comply with ever-changing VAT requirements. By moving financial transaction and enterprise data to the cloud, SMEs will have the visibility they need for accurate, compliant reporting. Extra tools are also available to streamline the process.

When all a company’s financial data is available in the cloud, staff can access it quickly – no matter where they are – to create the necessary forms and financial reports for VAT returns. Policy errors are easier to spot and can be rectified early on before they impact the process. Certain solutions even allow for companies to file their returns directly to HMRC, saving on precious reporting time.

There is a significant opportunity for automation in VAT calculation. When the systems, policies and data are all joined up, machine learning solutions can select and apply the correct VAT rate and Robotic Process Automation (RPA) can automate many of the tasks required. Not only does this speed up the process, it reduces the risk of human error and gives staff the space and time to focus on more important tasks. Indeed, 52% of businesses believe automation contributes to higher quality operations and 49% to greater workforce agility, according to stats provider Statistica.

Cloud accounting solutions minimise errors and help SMEs meet difficult deadlines. Yet, they also come with the added benefit of automatically complying with the latest financial legislation. Any changes in top-line or specific VAT rates will immediately be accounted for, reducing the need for manual compliance checks while further limiting the opportunity for mistakes. Policy governance is kept under control so staff and business owners can sleep easy.

Digitised accounting software will help SMEs stay on top of the latest rules and regulations. They can keep track of policies and automatically calculate the tax owed, ensuring compliance while taking the headache out of submitting returns. It enables them to enjoy the benefits of a VAT changes while continuing to meet their responsibilities.

Adam Prince is vice president, product management, compliance and Brexit at Sage

Further reading: VAT return software problems and how to tackle them