VAT on accommodation and hotel rooms
Depending on the nature of your business, travel and overnight accommodation can account for a significant proportion of your business outgoings. Knowing how and when to reclaim value-added tax (VAT) on these expenses can mean significant refunds.
Reporting and reclaiming VAT on hotel rooms, transport, meals and other essential business expenses is an essential part of running a VAT-registered business. Read on to find out more about the ins and outs of reclaiming VAT on business expenses such as accommodation and hotel rooms and how Mooncard can help you streamline the process.
VAT rates on accommodation and hotel rooms
The current VAT rate that applies to hotel rooms in the UK is 20%.
In response to the COVID-19 pandemic, the UK government introduced a temporary reduced rate of 5% to all supplies of overnight accommodation, such as hotels, boarding houses and similar establishments. This meant that businesses providing accommodation only had to charge customers an extra 5%. This temporary rate was increased to 12.5% in October 2021 and came to an end in March 2022. The standard 20% rate was reinstated as of April 2022.
While the hospitality industry welcomed the introduction of the reduced rate, the return to the 20% meant that the cost of the supply of hotel accommodation effectively increased overnight.
Although this had a direct impact on individuals travelling for holiday and leisure purposes, it did not have the same impact on business, because VAT-registered businesses can reclaim the VAT on overnight accommodation.
In other words, if the accommodation was booked “wholly and exclusively” for the purposes of the business, 20% can be reclaimed through the business’s VAT return. This can add up to a significant sum if your employees do a lot of business travel requiring overnight stays.
In order to recover the VAT that has been paid on hotel rooms and other accommodation, proof of the VAT payment must be provided.
How can VAT be recovered?
When employees of a VAT-registered business are required to spend the night in a hotel in the course of their business, the business can reclaim the 20% VAT on the cost of their accommodation.
To do so, they need to include the VAT payment in their quarterly VAT return that they file with the HMRC or their annual VAT return if the business operates under the Annual Accounting scheme. The business must be able to provide proof of the VAT payment through documentation, such as an invoice with the VAT listed separately.
In some cases, providing this documentation can be difficult or even impossible. This is particularly the case when booking accommodation through hotel booking websites or corporate travel managers. Invoices from these intermediaries do not include VAT, because they are covered by a separate set of rules and regulations known as the Tour Operators Margin Scheme (TOMS). The transaction incurs what is known in tax jargon as a “disbursement”, whereby a payment is made to an intermediary rather than to the accommodation supplier directly. In such cases, the VAT is not recoverable, and the business will have to cover the full cost of the accommodation.
The information given above on recovering VAT on hotel rooms and other forms of accommodation applies to all hotels in the UK. What happens, however, when your employees have to travel abroad?
Since Brexit, the European rules on VAT no longer apply to the UK. Nevertheless, VAT that is paid on accommodation and other business expenses abroad can often still be reclaimed, albeit through different channels. While the VAT payment still has to be included on the company’s UK VAT return, it is recovered through a process known as the Electronic VAT Refund. More information can be found on the HMRC website.
Again, valid VAT receipts are required to make any VAT claims on overseas business expenses.
Other business expenses and VAT
A business trip that involves overnight accommodation often also means other associated business expenses. Food, drinks, road tools, transport, parking, car hire, plane tickets, parking, fuel and a multitude of other expenses can all have a VAT component which, under strict business accounting rules, can be reclaimed. Similarly, VAT can be reclaimed under certain strictly defined circumstances, on gifts and entertainment. Remember that different rules apply regarding VAT on gifts and entertainment for staff and for clients.
The basic rule to follow when it comes to knowing whether VAT can be reclaimed is that the expense must be reasonable and exclusively for business purposes. The provisions also only cover expenses incurred by employees. Any expenses incurred by family members accompanying the employee, or expenses incurred by subcontractors are not eligible for a VAT refund.
Because the rules around VAT are complex and can change, it is important to stay fully informed of the latest developments. HMRC publishes up-to-date guidance on reporting and recovering VAT on deductible expenses and specialist tax advice should be sought in complex cases.
Accommodation and other business expenses incurred during travel can really add up for some businesses. Knowing how to recover the VAT on these business expenses can make all the difference. The Mooncard corporate card can help streamline your business expenses and keep track of VAT payments, to make your VAT reporting easier. Find out more with a free demonstration!