VAT on long hotel stays and deposits

Hotel rooms and VAT

Rooms in hotels, inns, boarding houses and similar establishments are standard-rated. VAT Notice 709/3 includes among similar establishments "motels, guesthouses, bed and breakfast establishments, private residential clubs, hostels, and serviced flats (other than those for permanent residential use)". An establishment does not have to serve food to count as a hotel. The temporary reduced rate for tourism and hospitality ended on 31 March 2022.

Holiday accommodation such as cottages, chalets, caravans and tents follows separate rules in the same notice, and the long-stay rule in this guide does not apply to it. Section 5.8 says: "There is no reduced value rule for holiday accommodation."

The reduced value rule for long stays

Section 3.2 of the notice sets the rule: "If a guest stays in your establishment for a continuous period of more than 28 days, then from the 29th day of the stay you should charge VAT only on that part of the payment that is not for accommodation."

The rule lowers the value VAT is charged on. The rate stays at 20%, the supply stays taxable, and the normal rules for reclaiming VAT on your own costs still apply (section 3.1). Where you charge an inclusive price for bed and board, you split it reasonably:

• meals, drinks and other services carry VAT in full
• at least 20% of what remains is treated as being for facilities, and carries VAT
• if the true value of the facilities is more than 20%, VAT is charged on the true amount
• the rest, which is the sleeping accommodation itself, carries no VAT from the 29th day

A 35-day room-only stay at £100 a night before VAT

• Days 1 to 28: VAT on £2,800£560.00
• Days 29 to 35: VAT on 20% of £700 for facilities£28.00
• VAT on days 29 to 35 without the rule£140.00
• VAT on the whole stay£588.00

A long-stay guest on dinner, bed and breakfast at £100 a night before VAT

• Meals and drink in the nightly price£30.00
• Remainder for the room and facilities£70.00
• At least 20% of the remainder treated as facilities£14.00
• Value carrying VAT from day 29: £30.00 plus £14.00£44.00
• VAT a night from day 29£8.80
• VAT a night for days 1 to 28£20.00

Who qualifies

The rule applies to individuals who stay more than 28 days, alone or together with others staying at their expense (section 3.3). It runs separately for each person: "the reduced value applies from the 29th day of each individual's stay".

Where someone else books and pays, the rule still applies if the individual stays more than 28 days. The notice's example is accommodation for homeless people booked by a local authority. The rule does not apply to company bookings used by a succession of short-term occupants who each stay less than 29 days, such as an airline's block booking for crew stopovers.

Breaks in a stay

The stay must be continuous. A guest who leaves and comes back starts a new stay, with three exceptions: a long-term resident who leaves for an occasional weekend or holiday, a student who leaves for the vacation and returns for the next term, and a guest who pays a retaining fee. In those cases the time away is ignored, and it does not matter whether the guest returns to the same room.

Breaks in a stay

Pattern of stay	VAT
Three weeks every month	Charged in full on every night
Five weeks, away for a week, then five more weeks	Reduced value only in the fifth week of each separate stay
A long-term resident away for an occasional weekend or holiday	Time away ignored. Full VAT for the first 28 days of the overall stay only
A student away for the vacation who returns for the next term	Time away ignored
A guest who pays a retaining fee while away	Time away ignored

A retention fee paid for an absence after the first 28 days can benefit from the reduced value rule. If the fee is no more than the part of your charge treated as being for accommodation, no VAT is due on it. If it is more, you split it between accommodation and facilities (section 7.5).

Deposits, no-shows and cancellations

Section 7.1 says: "Most deposits serve as advance payments, and you must account for VAT in the return period in which you receive the payment." If the guest does not take up the booking and you keep the deposit, "VAT remains due".

The notice's example is a guest who pays £100, the full price of the room, and then cancels or does not arrive. VAT is due on the £100. The payment "cannot be reclassified later" as a cancellation charge outside the scope of VAT. Had the guest paid 50% of the price, VAT would be due on £50. The VAT you accounted for can be reduced only to the extent that you refund the payment.

• Card guarantees: where card details are taken and nothing is charged until the stay, VAT is due when the payment is taken, including a charge to the card after a no-show (section 7.3).
• A commitment to pay at a future date is taxable if the guest is obliged to pay and the stay does not happen.
• Booking fees are treated in the same way as deposits (section 7.4).

A £120 deposit including VAT, kept after a no-show

Deposit kept in full

VAT was due in the period the deposit was received and stays due.

£20.00

Half the deposit refunded

VAT can be reduced only to the extent of the refund.

£10.00

Meeting rooms, weddings and other charges

A room hired for a meeting or conference with no catering is exempt from VAT unless you have opted to tax (section 4.1). If you provide only minimal refreshments such as tea, coffee and biscuits, the room and the refreshments are one exempt supply. A meal or buffet served with it is a separate standard-rated supply (section 4.3).

Where a meeting room, meals and overnight rooms are sold for one price, each element is a separate supply: the catering and bedrooms are taxable, and the meeting room is exempt unless you have opted to tax. Car parking, equipment hire and bar sales charged separately are standard-rated. A wedding package of rooms for the ceremony, the wedding breakfast and the evening party is a single standard-rated supply, whoever supplies the catering (section 4.4).

An agent who arranges accommodation on behalf of someone else accounts for VAT on any booking fee it charges, whether or not the booking is taken up (section 7.4).

Selling the hotel itself is a separate matter. The freehold sale of a hotel building is exempt unless the seller has opted to tax, or the building was completed less than 3 years before the sale, in which case it is standard-rated. A hotel operator selling the business and its assets checks whether the sale is a transfer of a going concern under VAT Notice 700/9 (section 4.5).

Service charges are standard-rated, and tips "given voluntarily over and above the total charge you receive are outside the scope of VAT" (sections 7.6 and 7.7). Where staff pay for accommodation or meals in your establishment, the notice says "the payments are treated as including VAT and you must account for it on your VAT Return" (section 4.2).

Common mistakes and what HMRC does

• Applying the reduced value to stays broken by absences that are not an occasional weekend, holiday, vacation or paid retention.
• Applying it to company bookings used by a series of guests who each stay less than 29 days.
• Treating less than 20% of the remainder as facilities, or using 20% where the facilities are worth more.
• Charging no VAT on meals and drinks during a long stay.
• Moving a kept deposit to a cancellation fee code with no VAT on it.
• Accounting for VAT on a deposit in the period the guest arrives. VAT is due in the period the deposit is received.
• Treating a wedding package as partly exempt.

An error you find yourself can be corrected on your next VAT return if its net value is £10,000 or less, or up to £50,000 where it is no more than 1% of the box 6 figure on that return. Larger errors, and any deliberate error, are reported to HMRC separately, within a time limit of four years (VAT Notice 700/45). Where HMRC finds the error, it assesses the VAT, and a penalty for an inaccurate return can be added: up to 30% of the extra tax where reasonable care was not taken, and up to 70% or 100% where the error was deliberate.

Records and deadlines

• For each long stay: the guest's name, arrival date, any absences and the reason for them, the date the reduced value starts, and how an inclusive price was split between meals, facilities and the room.
• For each deposit: the date received, the amount, the VAT period it went into, and any refund.
• Your booking terms on deposits, cancellations and card guarantees, with the dates each version applied.
• VAT records kept for at least 6 years (VAT Notice 700/21).
• VAT return and payment due one calendar month and 7 days after the end of each VAT period.

How we help

We set up your booking system to mark the 29th day of each guest's stay, split inclusive long-stay prices between meals, facilities and the room, and check kept deposits and card guarantee charges before each VAT return. More for hotels and B&Bs, and on accounts and VAT.