Chancellor cuts VAT to 5% for kids’ meals, 10p rise in tax free mileage rate

Sara White, Editor, Business & Accountancy Daily. Croner.

Summer cuts to VAT to 5% for children’s meals across hospitality sector and visitor attractions, tax free mileage rate increased and foreign branch exemption removed for oil and gas sector.

While the focus of the pre-briefing of the chancellor’s plans was a package of summer holiday measures, dubbed the Great British Summer Saving Scheme by Rachel Reeves, there were a number of more serious tax measures announced including 5% temporary VAT rate, approved mileage rate hike and a profit shifting clampdown.

In a positive move the chancellor increased the approved mileage rate for personal car use for business trips. This was increased for the first time in more than 15 years.

In a brief speech, chancellor Rachel Reeves addressed the problems facing business as a result of the Iran war and closure of Strait of Hormuz.

With soaring petrol and diesel prices, the chancellor announced a 10p per mile increase in tax-free mileage rates with the hike backdated to 6 April 2026, ‘benefiting those who need to drive for work, from care workers to plumbers’.

This means an increase from the current 45p for cars and vans to 55p per mile for the first 10,000 business miles in the tax year, and 25p for mileage over 10,000 miles. There will be no change to the motorcycle rate. HMRC has updated the rates page stating the new approved mileage rates are ‘approved from tax year 2026 to 2027’.

This is the first increase in the approved mileage rate for 15 years with the rate frozen since April 2011.

Confirming the 5p fuel duty freeze announced by the PM Keir Starmer at PMQs on Wednesday, Reeves added: ‘The government has also this week set out additional, targeted support for those businesses most exposed to rising fuel costs.’ 

For hauliers there will be a 12-month road tax holiday for HGVs, saving the typical heavy lorry up to £912.

To support farmers and the rail freight industry, duty will be cut on red diesel by over a third until the end of this year.

In a bid to tackle soaring profits at oil and gas multinationals as a direct result of the Iran war which has seen the price of a barrel of Brent crude oil hit $110, almost doubled since February when the war broke out, the chancellor addressed the use of lower tax jurisdictions.

Reeves said: ‘I am bringing forward specific changes to the taxation of foreign branch profits; changing how companies are taxed in relation to their overseas activities. 

‘Currently, some oil and gas groups that operate overseas through foreign branches have structured their tax affairs in a way which ensures they pay little or no corporation tax on their UK energy trading profits. 

‘Today we are putting an end to that practice. We expect these reforms to raise hundreds of millions of pounds a year and fund the package of measures set out today, with costings certified by the OBR forecast in the usual way.’

Meantime, oil and gas companies were targeted with an announcement about a clampdown on foreign branch permanent establishment (PE) exemption on corporation tax.

Under the new rules, UK-resident companies that conduct activities in relation to oil and gas extraction and exploration through foreign PEs will not be able to use the corporation tax exemption from 1 September 2026. Other sectors will not be affected and HMRC has set out a policy paper on the new rules.

The change to oil and gas tax rules are intended to have effect for accounting periods beginning on or after 1 January 2027. A full impact assessment is not yet available.

On longer term support for businesses, there was little detail, but the chancellor stressed ‘any support will also need to be carefully targeted at firms most exposed to the crisis’. 

‘While many firms have been insulated from recent prices rises through fixed price contracts, there are sectors that face particular structural issues related to energy costs.’

On the time-limited summer support, the chancellor announced a 5% summer VAT rate for children’s meals at restaurants, cafes and hotels, and the wider hospitality sector, over the summer. The discounted VAT rate will kick in from 25 June when the school holidays start in Scotland and will end on 1 September 2026.

There will also be a discounted 5% VAT rate on children’s tickets to attractions, including theme parks, cinemas, zoos, fairs and soft play.

This will require a very quick change to software to ensure the correct VAT rate is charged and the food served is sold as part of a children’s menus.

The HMRC guidance on the reduced rate VAT states: ‘The reduced rate applies to the following categories of supplies where the conditions described are met: children’s meals, children’s cinema, theatre, show and concert tickets, and admission to certain attractions.

‘The reduced rate applies to the supply of children’s meals where both of the following conditions are met:

• the meal is held out for sale only as a meal for children

• the meal is supplied as part of catering services by a restaurant, café or similar establishment for consumption on the premises.

HMRC stressed: ‘Where businesses have already accounted for VAT at the standard rate and subsequently choose to apply the lower rate, they should make the necessary adjustments in their VAT accounts. The government would expect that where a customer has prepaid that they would be refunded for any additional VAT paid.’

Finally, bus fares across England will be free for children aged between five and 15 in August, subject to bus companies signing up. It is already free in London and Scotland.