Most hotel VAT articles focus on compliance fundamentals: rooms are standard-rated, food and beverage sales require consideration, and long-stay rules may apply. While important, these are rarely the areas where significant commercial value or risk arises.
The more useful question is whether VAT treatment has kept pace with the way the hotel actually sells, prices and records its income. VAT exposure often emerges where commercial developments have outstripped the underlying VAT analysis.
Packages and promotions
Room-only accommodation is generally straightforward. Complexity arises when hotels introduce packages combining accommodation with breakfast, dining, spa treatments, golf, parking, upgrades or other services.
The VAT treatment should reflect what the customer is purchasing in substance, rather than the default product coding within the booking system. Incorrect analysis can affect pricing, margins, invoicing and VAT reporting, potentially leading to overpaid VAT or unrecognised liabilities.
Events and function room income
Hotels frequently group event-related income together for accounting purposes. However, the VAT treatment may differ depending on whether the supply relates to room hire, catering, conference facilities, equipment rental, accommodation or a combination of services.
A single accounting category does not necessarily mean a single VAT treatment. The underlying supplies should be reviewed to ensure VAT is being accounted for correctly.
Long-stay accommodation
Special VAT rules can apply where guests occupy accommodation for more than 28 consecutive days. For hotels, serviced accommodation providers and aparthotels, these rules can materially affect pricing and profitability.
Where booking systems, corporate rate cards or contracts assume VAT applies uniformly throughout a long stay, opportunities may be missed. Operators should ensure systems can identify and correctly process qualifying stays.
Cancellations and no-shows
Many businesses assume cancellation charges and no-show fees fall outside the scope of VAT because no accommodation was ultimately provided.
However, HMRC’s position is often that such payments remain subject to VAT where they relate to the customer’s right to receive the accommodation or service. The VAT treatment should therefore be reviewed against the booking terms and underlying contractual arrangements.
Online travel agents
Sales through online travel agents (OTAs) can create additional complexity. The correct VAT treatment depends on the contractual arrangements and, in particular, who is making the supply to the guest.
Where contracts, booking flows and VAT reporting are not aligned, VAT can be accounted for on the wrong value, by the wrong party or in the wrong jurisdiction. These issues often remain undetected until challenged by HMRC or identified during a VAT review.
Refurbishments and capital projects
The most significant VAT recovery risks and opportunities frequently arise during refurbishments, fit-outs and redevelopment projects.
Before expenditure is incurred, hotels should consider:
- Whether VAT will be fully recoverable;
- Whether costs are being incurred by the correct entity;
- Whether landlord and tenant arrangements have been structured appropriately; and
- Whether the Capital Goods Scheme may apply.
Early VAT planning is generally far more valuable than attempting to rectify issues once projects are underway.
Our view
Most hotels do not need another review confirming that room income is subject to VAT. The greater value lies in identifying where commercial practices, pricing models and operating arrangements have changed without a corresponding VAT review.
Packages, online platforms, long-stay guests, cancellation policies and capital projects can all have a significant impact on margins, cash flow and VAT risk. If these areas have not been reviewed recently, it is worth testing whether the VAT treatment remains aligned with commercial reality.
How we can help
HaysMac’s VAT team works with hotel and hospitality businesses to review the areas that have the greatest commercial impact. We assess booking processes, package structures, long-stay arrangements, OTA contracts, cancellation policies and VAT recovery on capital projects, providing practical advice focused on risk, cash flow and profitability.
Get in touch with Dougie Todd, Partner & Co-Head of VAT, or Stephen Patey, VAT Director, to find out more.
