Nicosia – As part of its efforts to boost the coronavirus-stricken economy, the Cyprus government has temporarily reduced the VAT rate that applies to certain services in the tourism, restaurant and transport industries from 9% to 5%.
The Council of Ministers, exercising the relevant powers granted under Article 18(2) and Article 18A(2) of the VAT Law 95(I)/2000-2020 as amended, issued Decree Κ.Δ.Π 268/2020 which amends Schedule 5 (supplies of goods and services subject to the reduced rate of 5%) and Schedule 12 (supplies of goods and services subject to reduced rate of 9%) of the Cyprus VAT Law.
The Decree was published in the Cyprus Official Government Gazette on 23 June 2020 and it is applicable for the period from 1 July 2020 until 10 January 2021 in respect of:
- Accommodation services provided by hotels and similar establishments, including the provision of holiday accommodation;
- Restaurant and catering services;
- Transportation of passengers and their accompanying luggage within the Republic by urban, intercity and rural taxis and by tourist and intercity buses.
Effectively, by removing the above items from Schedule 12 – where they are currently found – and inserting them in Schedule 5, the VAT rate applicable to the particular services is reduced from 9% to 5%.
Further important points to note
Temporary nature of the measure
The reduction is only a temporary measure, triggered by the Covid-19 crisis and an attempt by the Government to stimulate consumption and support businesses in the hospitality and tourism sectors.
This means that, as from 11 January 2021, the reduced VAT rate of 9% will be applicable again (unless the measure is extended in time).
VAT will be due at the reduced rate of 5% on all relevant supplies made on, or after, the date on which the change takes effect, that is 1 July 2020, but not later than 10 January 2021 – the date the measure ends.
It is important to note that, when there is a change in the VAT rate, although VAT continues to be chargeable in accordance with the normal tax point rules, affected suppliers are allowed to choose to impose the VAT rate as per the basic tax point instead and thus for a certain period of time have a choice as to which VAT rate to apply.
Taking advantage of the available option, which is provided for in Article 55 of the VAT Law, makes particular sense when there is a reduction of the applicable VAT rate (e.g. from 9% to 5%).
What this means in practice is that, where the basic tax point – which is the time the services are completed – is after the date of the VAT rate change, VAT could be accounted for at the reduced rate of 5% instead of the applicable rate at the actual tax point, which would have arisen before the completion date, should a VAT invoice or payment is received beforehand.
The above is best illustrated with an example.
- A supplier of catering services is to invoice in advance 50% of the agreed price for catering services to be provided on 4 July 2020 in respect of a charity function.
- In particular, a VAT invoice is to be issued on 26 June 2020 amounting to EUR 1.500 plus VAT.
- After the function has taken place, the remainder of the price will be invoiced on 6 July 2020.
VAT treatment as per the Cyprus VAT Law:
- The basic tax point in the above scenario is the date of the completion of the services, that is 4 July 2020
- However, there are two (2) actual tax points, one at each invoice date, that is 26 June 2020 and 6 July 2020
- The advance invoice, issued on 26 June 2020, should include a VAT charge of 9%, which is EUR 135 (EUR 1.500 at 9%)
- The final invoice, issued on 6 July 2020, should include a VAT charge of 5%, which is EUR 75 (EUR 1.500 at 5%)
- Therefore, normally, the supplier will account for VAT at the actual tax points at the applicable VAT rates
- However, since there is a change of the VAT rate and the catering services are completed on 4 July 2020, the supplier can choose to charge VAT at the lower rate of 5%, which applies on that date, instead of having to charge 9% VAT on the advance invoice and 5% only to the final invoice
- Nevertheless, since the advance invoice will be issued before 1 July 2020, and the old rate of 9% must be shown on that invoice, the way to correct the rate is by issuing a credit note
- The credit note should be issued not later than 14 days after 1 July 2020 and it must include:
- The identifying number and date of issue of the credit note
- The name, address and VAT registration number of the supplier
- The customer’s name and address
- The identifying number and date of issue of the VAT invoice (which is credited)
- A description which identifies the services provided
- The amount of the VAT being credited (in our scenario that is EUR 60).
Further details on the options available upon VAT rate change
You could find further details of the practical application of the options available to affected suppliers in Appendix E of the General VAT Notice. Link to the Notice is available here.
Steps to take
All affected businesses must take timely steps to adjust their accounting systems in order to correctly take account of the VAT rate change.