VAT on hotel accommodation in the UK, including long stays

Hotel accommodation in the UK is standard-rated for VAT at 20%. That single sentence covers most of what a leisure hotel needs to know — and then there is the rule for long stays, which catches out almost every property that takes contract or relocation business.

This is a general explanation, not tax advice. The authority is HMRC Notice 709/3, and anything unusual should go to your accountant.

The ordinary case

A guest stays three nights at £100 a night. You charge VAT at 20% on the accommodation. The room rate you advertise normally includes it, so £100 inclusive is £83.33 net and £16.67 VAT.

Extras follow their own treatment: breakfast and restaurant food are standard-rated; some retail items differ. Keep them as separate lines on the folio so the VAT is visible and correct.

The long-stay rule — where hotels go wrong

When a guest stays more than 28 consecutive days in the same establishment, the "reduced value rule" applies from the 29th day onwards.

From that point, VAT is charged only on the part of the bill that is not accommodation — the facilities element. HMRC requires that at least 20% of the total is treated as facilities, so in practice the common approach is to charge VAT at 20% on 20% of the charge, giving an effective VAT rate of 4% on the accommodation portion.

The important details:

• It starts on day 29, not day 1. The first 28 days are charged at the full rate.
• The stay must be continuous, in the same establishment. A guest who checks out and returns a week later starts again.
• It applies once the 28 days have been exceeded, and continues for as long as the stay continues.
• Meals and other services are unaffected. They stay standard-rated throughout.

Why this matters more than it sounds

Any property doing council housing, relocation, construction crews, or long-term corporate work will have stays that cross 28 days. If your system charges 20% throughout, you have overcharged VAT — and if the client is not VAT registered, or is a local authority with its own recovery arrangements, they will notice and ask for it back.

The reverse error is worse: applying the reduced value rule from day one, which underdeclares VAT to HMRC.

Neither mistake is rare, because both require a system that tracks continuous nights across a whole stay and changes treatment part-way through. Plenty of hotel software cannot do this, and the workaround becomes a spreadsheet and a quarterly panic.

Deposits and cancellations

Deposits create a tax point when received. VAT is due on a deposit for accommodation in the period you receive it, not the period of the stay.

Cancellation charges are more nuanced. A genuine compensation payment for a cancelled booking is generally outside the scope of VAT, whereas a charge that is really payment for a service supplied is not. Following HMRC's revised position on early termination and cancellation fees, many retained deposits are treated as consideration and therefore taxable. If cancellation income is material for you, get this checked rather than assuming.

What to look for in your PMS

Ask these before you assume it is handled:

• Does it automatically switch to the reduced value rule after 28 continuous nights?
• Does it handle a stay that is extended past 28 days mid-stay, having started as a short booking?
• Can it produce a VAT breakdown per invoice showing both treatments where a stay crosses the threshold?
• Does it handle a consolidated monthly invoice for a contract client, with the right treatment per stay?
• Can it issue a credit note that reverses the VAT correctly?

The last two matter enormously for contract business, and are where general-purpose leisure hotel software tends to be weakest. If you carry council or corporate accounts, make these a shortlisting criterion rather than an afterthought — the point is made more generally in how to choose a PMS for a small hotel.

Invoicing contract clients

A few practical habits that prevent disputes:

• Put the purchase order number on the invoice. Many public-sector clients will not pay without it.
• Show each stay separately, with dates, guest and nights — a lump sum invites queries.
• Keep invoiced and uninvoiced nights clearly distinct in your own reporting. "Outstanding" should mean invoiced and unpaid, not everything not yet billed. Conflating the two is how hotels chase money that was never asked for.
• Never offset a credit note against an unrelated invoice without agreement — reconcile them explicitly.

Record keeping

Keep VAT records for six years, and make sure your PMS export gives your accountant what they need without manual rebuilding. Under Making Tax Digital, your VAT returns must come from digital records with a digital link through to submission — a figure retyped from a printout does not satisfy that.

InnCloud handles the 28-day reduced value rule automatically, including stays extended mid-booking, and produces consolidated contract invoices with PO numbers. Start a 7-day free trial.