Hotel and Serviced Accommodation – Why are there so may VAT rates?

Supplies of hotel and serviced apartments can give rise to a variety of different VAT liabilities.  This can be confusing to business customers who want to know if they can recover the VAT or not. In this post we attempt to unravel some of the confusion. 

Hotel Accommodation 

In the UK the provision of hotel, holiday accommodation and serviced apartments for short term use is subject to VAT at the standard rate.  Where employees need to travel for business purposes and stay in a hotel or serviced accommodation in the UK for a few nights, VAT at the standard rate is chargeable.  Such VAT would be recoverable by a business customer, subject to the normal rules. It is of course important that the business retains a VAT invoice to support VAT recovery. 

Purchase from a Travel Agent 

Often a business may buy in hotel accommodation from a travel agent.  As we have mentioned in a previous posting, some travel agents often operate under a special VAT scheme for travel agents called TOMS or ‘tour operators margin scheme’ which means that they don’t disclose the VAT on their invoices, so it may seem that no VAT has been charged – in fact VAT is included but not separately shown so it cannot be recovered.  Fortunately, most business travel agents are aware of this and arrange things in such a way so that the hotel invoices the business directly with VAT shown.  

Long Stay Guests

As detailed above VAT is charged on supplies of hotel accommodation.  However, if an individual stays in a hotel or serviced apartment for over 28 consecutive days there are special rules which reduce the value of the supply of the accommodation for VAT purposes to 20% of the ‘real’ cost.  Output VAT still applies but it is calculated on 20% of the value of the hotel stay, giving an effective VAT rate of 4%. This reduced value only applies to the accommodation element from Day 29 onwards – up until day 28 the standard rate of VAT applies.  Therefore, if meals or other services are provided the relief doesn’t apply and the standard rate of VAT applies. 

It is important to note the rule does not apply to bookings by companies where the accommodation is used by a succession of short-term occupants, and each stay is less than 29 days at a time. A guest’s stay must be continuous to qualify for the reduced value rule. For example, if a guest stays for 3 weeks every month over the course of a year, VAT at the standard rate is chargeable because day 29 has never been reached. 

The reduced valuation rules can create issues for Accounts Payable systems which may not have the flexibility to deal with a reduced valuation and some systems will use a 4% VAT rate as a “quick fix”, even though there is no such rate.    

The reduced value rules became more complex during Corona when HMRC introduced reduced VAT rates for accommodation of 5% and then 12.5%.

Lengthy Stays  

Finally, sometimes a business will rent a flat for an employee for an extended period, say for 12 months.  If the owner enters into a proper tenancy agreement, such as an assured shorthold tenancy, any rent payable would be exempt from VAT.  In such a case, where additional services are offered e.g. meals, cleaning etc. VAT at the standard rate would need to be charged on the additional services.