VAT breaks for the hospitality sector?

By Richard Andrew, Manager and hospitality specialist.

I work with a large number of guest houses and hotels in the Lake District and a common complaint from these business owners is the effect of VAT on their business. The main issues normally fall into two categories: for hotels that are VAT registered, it is that the rate of VAT at 20% is too high and for guest houses it is that the VAT registration threshold set at £79,000 is too low.

Taking these issues in turn, there is an argument to reduce the VAT rate for hospitality services from 20% to say 15% or even 10%. By doing this, it would allow hotels to price their rooms more competitively in comparison with holidays abroad. This would increase the spend on UK soil and also encourage visitors from abroad. Whilst guests stay at a hotel they also spend money at local attractions and tourist sites which creates a further boost to the local economy. Within Europe many countries have a lower rate of VAT for hotels and restaurants ranging from 5% to 15%. So this doesn’t provide a level playing field for UK hotels when competing with hotels in Europe.

The issue of the VAT registration threshold at £79,000 being too low causes problems for guest houses. Many of them keep their rooms closed at the end of their financial year in order to stay below the VAT threshold. This is because once this threshold is breached, VAT is applied to all of their sales. This creates a VAT liability of up to 20% of their turnover. It is likely that most, if not all of this VAT cannot be passed on to the guest. The VAT registration threshold is a significant problem for any business that sells directly to the consumer with sales at a level near the threshold - it inhibits growth of businesses operating at this level.

If the government was to change the VAT rate for hospitality services and/or increase the VAT threshold then this would directly impact the funds in the tax coffers. However, by driving growth and encouraging further spending in the UK, the overall effect may mean that the government is actually better off.

Julian Ross, Managing Director of iKnow and hospitality expert adds:

"The VAT threshold forces many small businesses in the accommodation industry to make an extremely difficult decision; do they refuse more business and remain below the VAT threshold or “go for it” and try to generate enough business to make it worthwhile. With all revenue attracting VAT and the vast majority of costs not attracting VAT, this represents a life affecting decision for the businesses. Surely the government ought to be making growth an attractive proposition for all small business owners, particularly since they’re trying to encourage employment and recognise this sector as the place to do it! This decision has huge knock-on effects to the wider trade too – with accommodations turning down additional revenue, they don’t need to spend nearly as much on marketing and consumables and they’re much more likely to charge more for their rooms since filling the accommodation is not a driver. If businesses could take more business at a lower margin and not then be penalised by having to register for VAT, then I believe that they’d be very happy to do so in return for a greater eventual return."



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