VAT (VALUE ADDED TAX)

Since VAT is referred to throughout this chapter and elsewhere, it is worth dealing with at this stage so you can assess whether it does or should apply to you.

What Is It?

It is a tax which is administered, some say with vigour, by HM Revenue and Customs. It is levied on all ‘taxable supplies’ above a certain threshold.

Services for payment, which are what hoteliers provide, are classified as ‘standard-rated taxable supplies’. The current standard rate is 17½ per cent.

How Does It Work?

Every taxable person, viz an individual, partnership or company, who is or is required to be registered for VAT, must account for the tax when making a taxable supply. This tax is called output tax.

VAT charged to you on your business purchases is known as input tax.

At regular intervals, normally once a quarter, you will receive a VAT return (Form VAT 100) on which you will have to enter the output tax you have charged and the input tax you have been charged. If the output exceeds the input, you pay the difference. If the input exceeds the output, you claim the difference. Simple, isn’t it? Don’t you believe it!

A manual with supplements running to almost 200 pages and known as The VAT Guide answers all the ‘but what ifs’ and is obtainable free from HM Revenue and Customs, tel: (0845) 010 9000, web: www.hmrc.gov.uk .

You must of course maintain accurate records to enable you to complete the return. The form in which you keep them is not specified.




It is possible to alter the tax period normally adopted to fit in with your financial year. The system also allows you to take over the registration number of the outgoing hotelier. Although this has advantages, for example you may be able to opt for annual accounting straight away, it should be avoided since any liability found on that VAT number would become your responsibility.

Liability To Pay

If your business, or businesses, have a taxable turnover of more than the prevailing threshold for liability to pay VAT (in 2006/7 it was £61,000), you become a taxable person. (It is the person, known as a registered person, who is liable to pay VAT, not the business.)

If the business you are taking over has regularly turned over more than the threshold sum, registration to take effect on your takeover day is the obvious answer.

Otherwise, because from the date on which you are first required to be registered all taxable supplies you make are liable to VAT, you need to act promptly if it appears you may exceed the threshold. It is illegal to charge VAT before you have been allocated a number. Rules governing this situation are set out in the leaflet Should I Be Registered for VAT? obtainable from HM Revenue and Customs. Severe penalties are applied if rules are broken.

Should I Register Voluntarily?

It will rarely be sensible to apply for registration if the law doesn’t require you to. Very heavy starting-up costs would be needed to justify this course. Otherwise the tax erodes not only your competitiveness but also your profits and gives you a lot of paperwork to worry about.

An Example

As is shown on the VAT return reproduced in Figure 16, because of the new equipment bought, Andrew Bright is due a refund of £380 in his first tax period. Providing his turnover is as forecast, he will be a net payer in succeeding periods. His business therefore derives no long-term benefit from being VAT-registered.

Special Rules

Special rules peculiar to hotels apply if guests stay for a continuous period of more than four weeks. Without breaking this rule, long-term residents may take occasional weekends away or a holiday and students may go home for vacations if they return to the same accommodation the next term, or pay a retaining fee to reserve the accommodation.

In these circumstances, from the 29th day of the stay, VAT is not due on the accommodation charge. It must, however, be paid in full on meals, drinks and service, plus an extra amount, not less than 20 per cent of the remainder after meals, drinks and service have been deducted, for facilities. An example of how this works is shown in Figure 17.

The reduced value rules do not apply to block bookings by tour operators, airlines, companies and other organisations where accommodation is used by a succession of short-stay residents.




The rules governing VAT are always liable to change. The up-to-date situation can be ascertained by getting the booklets applicable to your situation from HM Customs and Excise. In addition to those already mentioned, you may find Hotels and holiday accommodation, Records and accounts and Transfer of a going concern of interest.