Are you running hotel, inn, boarding house, or similar establishment which provides long stays? Or maybe you do accounting and VAT returns for such a business? Then it is important to know about the reduced rate of VAT applicable for such long stays.

If your guest is staying for more than 28 days, then from 29th day onwards the rent part for the sleeping accommodation is exempt for VAT. Most people know this rule, but many does not apply this correctly.

For example, many service providers charge a flat 4% VAT if the stay is over 28 days. The VAT Act 1994 says that VAT should be charged only on the part of the payment that is not for accommodation. However, the chargers for each facility is not separate. The VAT Notice 709/3 para 3.3 says that “If you make an inclusive charge for bed and board you must apportion it reasonably and charge VAT on the full amount that is not for the accommodation. When you do this, you must calculate the amount of your charge that is for meals, drinks, and other services, and treat at least 20% of the rest as being for facilities. But if the true value of the facilities is more than this, you must charge VAT on the true amount.”

Many providers adapt the minimum 20% and charge VAT- 20% on 20% equals 4% which may not be accurate unless it is supported by unambiguous evidence and calculations.

Another common mistake is assuming the whole bill is charged at reduced VAT rate. VAT Act 1994 – sch 6 Para 9 (2) states “the value of so much of the supply as is in excess of 4 weeks shall be taken to be reduced to such part thereof as is attributable to facilities other than the right to occupy the accommodation”. Further in the VAT notice 709/3 explains this through a an example. If a guest stays for 3 weeks every month, you must always charge them VAT in full. If another guest stays for 5 weeks, leaves for a week, and returns to stay for 5 more weeks, the reduced value rule applies only to the fifth week of each separate stay.

However this has three exemptions as well. If guest’s departure is not seen to end their stay provided the guest either:

  • is a long-term resident and leaves for an occasional weekend or holiday
  • is a student who leaves during the vacation but returns to the same accommodation for the following term
  • pays a retaining fee
    In these cases, the time away is ignored. It does not matter whether the guest returns to the same room or not.

It is also important that the same person should stay for more than 28 days. If an airline blocks the rooms for a longer period, and different crew members uses it though the long stay reduced rate will not apply.

If you are an accommodation provider, and if there are guests staying for longer periods, ensure your billing system is correctly applying the VAT rates. If you are charging reduced rate and apportioning a portion of your billing to exempt items ensure your calculations are defensible before HMRC finds it otherwise.