UK: VAT Increase: Who Pays?

Last Updated: 20 December 2010
Article by Harpreet Bhatti, Richard Croker and Mark Nichols

The increase in the standard rate of VAT from 17.5% to 20% is due to take effect in only a few weeks time. Are you going to absorb this cost for the first few weeks over the notoriously quiet post Christmas season or are you going to pass it onto your guests? Many are yet to decide.

Key decisions

With effect from 4 January 2011, the standard rate of VAT is increasing from 17.5% to 20%. Hoteliers need to make two decisions; a commercial and a practical one. First, who is going to bear this VAT increase – the hotel or the guest and second, what actions need to be taken by the hotel to accommodate this increase in VAT.

Now or later?

Many hotels are leaving the decision on whether to pass on the VAT increase to hotel guests or to absorb the cost until the last minute. After the usual hustle and bustle of Christmas the first few weeks of a new year are notoriously quiet and difficult for hotels. With hotel bookings low and hotels making offers to try and incentivise guests, a VAT increase will only act as a disincentive for the money conscious guest. Without a consistent approach in the hotel industry and with decisions being left so late, a hotel absorbing the increase could have a competitive edge.

If the hotel is going to pass the VAT increase onto the hotel guest, it needs to update its systems, amend its prices and coordinate with its booking agents so it is ready for 4 January 2011. The key issues for hotels are bookings made before 4 January 2011 where occupation of the room takes place after this time and occupation spans the VAT increase. Anti-avoidance measures have been introduced which are designed to restrict the extent to which the 17.5% rate of VAT can be continued to apply to certain supplies of goods or services actually provided on or after 4 January 2011 when the standard rate changes to 20%.  

The rules

The basic position is that the time of performance of services (the "basic tax point") will determine which rate should apply. However, subject to the anti-avoidance measures detailed below, the tax point may be brought forward where a VAT invoice is issued or payment made prior to the provision of services, e.g. deposits or other advance payments.

Thus, subject to the below, applying the normal rules, hotels may rely on the following to determine which VAT rate to charge:

  • Any deposits and advance payments received for rooms on or before 3 January 2011 (even if occupation will take place from 4 January 2011 onwards) will be subject to VAT at 17.5%. Thereafter any payments received from 4 January 2011 onwards will be subject to VAT at 20%.
  • Any VAT invoices issued up to the end of 3 January 2011 should use the 17.5% VAT rate and any invoice thereafter should use the 20% VAT rate.

Anti-avoidance measures

Care has to be taken not to fall foul of the anti-avoidance measures. Broadly, these anti-avoidance provisions affect supplies actually made on or after 4 January 2011 to guests who are unable to recover all the VAT (i.e. non-business hotel guests or potentially exempt business guests) where payment is received or a VAT invoice issued before then and one of the specified conditions is met. In the hotel industry the conditions that may be relevant include:

  • a VAT invoice is issued that does not have to be paid in full within six months; or
  • the hotel (or a person connected with the hotel) finances a deposit or advance payment by the customer.

If, as seems unlikely in the ordinary course, the above applies, there will be a supplementary charge to VAT of 2.5% payable by the hotel to HMRC.

Occupation spanning 4 January 2011

In any event for occupation that spans the change in rate there are special rules that allow hoteliers to choose the rate that is applied.

If a hotel guest's occupation spans the VAT increase, the hotel may make an apportionment so that occupation made prior to 4 January 2011 will attract VAT at the rate of 17.5% and occupation on or after that date at 20%. Hotel's will have to adapt their systems accordingly in order to ensure that the system can deal with this change and that invoices are correctly issued.

To absorb or not to absorb that is the question. Time is running out for you to decide.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 15/12/2010.

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