Value Added Tax (VAT) on hotel and accommodation services is one of the most important areas of compliance for hospitality businesses in the UK. Whether you are a hotel operator, a holiday let landlord, a bed-and-breakfast owner, or a business traveller managing expense claims, understanding how VAT applies to accommodation is essential.
This guide provides a thorough overview of how VAT works in the UK hospitality sector, covering standard rates, exemptions, registration thresholds, reclaim rules, and the implications of HMRC policy as it stands in 2026.
Introduction
Value Added Tax (VAT) on hotel and accommodation services is one of the most important areas of compliance for hospitality businesses in the UK. Whether you are a hotel operator, a holiday let landlord, a bed-and-breakfast owner, or a business traveller managing expense claims, understanding how VAT applies to accommodation is essential.
This guide provides a thorough overview of how VAT works in the UK hospitality sector, covering standard rates, exemptions, registration thresholds, reclaim rules, and the implications of HMRC policy as it stands in 2026.
The Standard VAT Rate on Accommodation
In the UK, hotel and accommodation services are subject to the standard VAT rate of 20%. This applies to the vast majority of hotel stays, including:
- Overnight hotel room bookings
- Serviced apartment rentals
- Guesthouses and bed & breakfast accommodation
- Holiday cottages and self-catering lets
- Hostel stays
- Lodge and resort bookings
Key Rate Summary
Standard rate: 20%. Applies to most accommodation across the United Kingdom. This is the rate customers pay on the accommodation price charged by VAT-registered businesses.
It is important to note that during the COVID-19 pandemic (July 2020 to April 2022), the UK government temporarily reduced VAT on hospitality, including accommodation, to 5% and later 12.5% to support the sector. As of April 2022, the full 20% rate was fully reinstated and has remained in place since.
VAT Registration for Accommodation Businesses
The VAT Threshold
UK businesses, including hotels, B&Bs, holiday lets, and hostels, must register for VAT when their taxable turnover exceeds the VAT registration threshold. As of the 2025/26 tax year, this threshold is £90,000 over any rolling 12-month period (increased from £85,000 in April 2024). The deregistration threshold is £88,000.
Once registered, businesses must:
- Charge VAT at 20% on all standard-rated supplies (including room revenue)
- Submit regular VAT returns to HMRC (usually quarterly)
- Maintain accurate VAT records and issue VAT invoices on request
- Pay over-collected VAT to HMRC after deducting any reclaimable input VAT
Voluntary Registration
Businesses with turnover below the threshold may choose to register voluntarily. This can be advantageous if the business incurs significant input VAT (for example, during a refurbishment or the construction of new facilities) that it wishes to reclaim. Voluntary registration is particularly common among new hotels or holiday cottages in their early years of operation.
What Is Included in the VAT Charge?
VAT at 20% applies not only to the room rate itself but to a range of ancillary services provided as part of the accommodation package. Understanding the scope of taxable supplies is critical for proper invoicing and VAT accounting.
Long-Stay Accommodation and the 28-Day Reduced Value Rule
One of the most significant VAT reliefs in the UK accommodation sector is the reduced value rule that applies to long-term stays. Under HMRC rules (VAT Notice 709/3, Section 3), accommodation provided for a continuous period of more than 28 days is subject to a special reduced-value calculation. Still, it is important to note that the supply does not become exempt from VAT.
How the Reduced Value Rule Works
When a guest stays for more than 28 consecutive nights at the same hotel, inn, boarding house, or similar establishment, the reduced-value rule applies starting on the 29th day. Critically, the supply remains fully taxable (standard-rated), and HMRC does not treat this as an exempt supply. Instead, the value on which VAT is charged is reduced:
- For the first 28 nights: VAT at 20% is charged on the full room charge in the normal way
- From night 29 onwards: VAT at 20% is charged only on the non-accommodation element of the charge (i.e., meals, services, and facilities)
- HMRC requires at least 20% of the charge to be treated as facilities (reception, housekeeping, etc.), so the effective minimum VAT rate on the total charge from day 29 is 4%
- Any additional services, such as meals, parking, and laundry, remain fully standard-rated at 20% throughout
Important: Not an Exemption
The 28-day rule operates as a reduced value calculation, not an exemption. The supply remains taxable throughout, so the normal input tax rules continue to apply, and partial exemption does not arise. HMRC has noted cases where the 80% accommodation element has been incorrectly treated as exempt. This is wrong and should be challenged.
This rule applies to hotels, inns, boarding houses and similar establishments, but serviced apartments may also qualify if they meet that definition. It does not apply to holiday accommodation (such as holiday cottages or seasonal lets), where VAT at the full standard rate applies regardless of the length of stay.
The stay must be continuous to qualify. If a guest leaves and returns, each separate stay is treated independently, and the 28-day clock restarts unless the guest is a long-term resident who leaves only for an occasional weekend or holiday, or a student who returns to the same accommodation each term.
Exempt Supplies: When Is Accommodation VAT-Free?
Beyond the 28-day rule, certain categories of accommodation are treated as exempt from VAT entirely. Businesses making exempt supplies cannot charge VAT, but they are also generally unable to reclaim input VAT on costs directly related to those exempt activities.
Residential Property Lettings
The letting of residential property, such as a flat or house, on an assured shorthold tenancy is exempt from VAT. This is distinct from holiday lets or serviced accommodation. A standard residential tenancy is not subject to VAT regardless of duration.
Student Accommodation
Accommodation provided by eligible bodies (such as universities and colleges) to students is generally exempt from VAT. However, commercial student accommodation providers may be subject to different rules, and the position can be complex where both qualifying and non-qualifying supplies are made.
Charitable and Care-Related Accommodation
Accommodation supplied by charities or for qualifying welfare purposes (such as sheltered housing or care home accommodation) may also be exempt from VAT, subject to specific conditions set out in VAT Notice 742.
Reclaiming Input VAT: Guidance for Operators
One of the most commercially important aspects of VAT for hotel and accommodation businesses is the ability to reclaim input VAT, the VAT paid on business expenses. VAT-registered accommodation operators can typically reclaim input VAT on:
- Building and refurbishment costs
- Furniture, fixtures, and fittings
- Kitchen equipment and appliances
- IT systems, booking software, and telecommunications
- Marketing, advertising, and professional services
- Utility bills and energy costs
- Food and beverage purchases for resale
Note: Shared costs, such as utilities, maintenance, or cleaning, must be apportioned using a reasonable method where the property is used for both taxable and exempt accommodation. Documentation of the apportionment method is essential in the event of an HMRC enquiry.
Partial Exemption
Where a business makes both taxable (standard-rated) and exempt supplies, it must apply the partial exemption rules to determine what proportion of input VAT it can recover.
In the accommodation sector, this most commonly arises where a business operates both short-stay accommodation (taxable) and residential property lettings (exempt) within the same business structure. For example, a property operator may run a hotel or serviced accommodation business while also letting separate apartments on long-term residential tenancies.
In these circumstances, the business must apportion its input VAT between taxable and exempt activities. Input VAT directly attributable to taxable supplies is recoverable in full, while input VAT directly attributable to exempt supplies is generally not recoverable. Input VAT relating to shared costs must be apportioned under the partial exemption rules.
It is important to note that long stays in hotels or similar establishments exceeding 28 days do not become exempt supplies. Under the 28-day reduced value rule, the supply remains taxable at the standard rate, but VAT is calculated on a reduced taxable value from day 29 onwards. Because the supply remains taxable, these long-stay hotel supplies do not create a partial exemption.
The standard method of partial exemption involves calculating the ratio of taxable turnover to total turnover, then applying that percentage to the residual input VAT. Businesses with complex supply structures may agree with HMRC on a special partial exemption method when the standard method does not produce a fair result.
Partial Exemption De Minimis
If the value of exempt input VAT is below the de minimis limit (£625 per month on average and no more than 50% of total input VAT), the business can recover all its input VAT as if it were fully taxable. This provides important relief for smaller operators with limited exempt income.
Business Travel and VAT Recovery on Hotel Bills
Employees Staying in Hotels
For VAT-registered businesses that book hotel accommodation for employees on business trips, the ability to reclaim VAT on hotel bills is a valuable benefit. Input VAT can be recovered on accommodation costs where:
- The stay is wholly for business purposes
- The hotel provides a valid VAT invoice showing the VAT amount
- The business is VAT-registered, and the cost relates to taxable business activities
The employee does not need to be the one making the booking; the VAT invoice needs to show the business as the customer, or be accompanied by sufficient evidence of business purpose
What Qualifies as a VAT Invoice?
For accommodation purchases over £250 (exclusive of VAT), businesses need a full VAT invoice to support the recovery of input VAT. This must include:
- The supplier’s name, address, and VAT registration number
- A sequential invoice number
- The tax point (date of supply)
- A description of the services
- The amount payable (excluding VAT), the VAT rate, and the VAT amount
For amounts under £250, a simplified VAT invoice (such as a standard hotel receipt) showing the supplier’s VAT number and the total amount including VAT is generally sufficient.
Holiday Lets and Short-Term Rental Platforms
The rise of platforms such as Airbnb, VRBO, and Booking.com has brought significant complexity to the VAT landscape for private holiday let owners. The VAT rules for holiday lets depend on whether the property owner is VAT-registered and the nature of the let.
When Holiday Lets Are Standard-Rated
Short-term holiday accommodation is generally standard-rated for VAT where the accommodation provider is VAT-registered or required to register. This applies to a wide range of short-term rental arrangements, including holiday cottages, serviced apartments, and properties marketed through online platforms.
Unlike long-term residential lettings, which are exempt from VAT, short-term accommodation supplied to visitors or travellers is treated as a taxable supply of holiday accommodation. As a result, VAT at the standard rate of 20% must be charged on the rental price where the property owner is VAT-registered.
This treatment applies regardless of whether the accommodation is booked directly with the property owner or through an online platform. Property owners must monitor their taxable turnover, and once it exceeds the VAT registration threshold (£90,000 as of the 2025/26 tax year), they must register for VAT and begin charging VAT on their accommodation charges.
It is important to distinguish short-term holiday accommodation from residential property lettings. Long-term residential tenancies, such as standard residential leases or assured shorthold tenancies, are exempt from VAT, whereas holiday accommodation provided for short stays remains standard-rated.
Platform Operators and VAT Complexity
Where accommodation is booked through a third-party platform such as Booking.com or Expedia, acting as an agent, the VAT invoice is typically issued directly by the accommodation provider. However, where a platform acts as principal (contracting with the guest in its own name), the VAT position becomes more complex and depends on the platform’s specific contractual arrangements.
The position for serviced accommodation operators and online travel agencies regarding the Tour Operators Margin Scheme has changed significantly following recent case law — see Section below.
Tour Operators Margin Scheme (TOMS) — Significantly Restricted in 2025/26
The Tour Operators Margin Scheme (TOMS) was a special VAT accounting arrangement under which qualifying businesses that buy in and re-supply travel services as principal could account for VAT only on their margin (the difference between the cost and the selling price), rather than on the full value of the supply. For accommodation businesses, TOMS has historically been attractive because the main cost of buying in accommodation (a residential lease) is exempt from VAT, allowing this cost to offset income before VAT is calculated.
However, the scope of TOMS as it applies to accommodation has been fundamentally narrowed by two major developments in 2025, rendering the scheme effectively unavailable to most accommodation businesses operating today.
The Sonder Upper Tribunal Ruling (January 2025)
The most significant development is the Upper Tribunal decision in HMRC v Sonder Europe Limited [2025] UKUT 14 (TCC), handed down on 14 January 2025. Sonder operates by leasing residential apartments on long-term leases (typically 2 to 10 years) and re-letting them as short-term holiday accommodation for an average stay of five nights.
The Upper Tribunal overturned an earlier First-tier Tribunal decision in Sonder’s favour and ruled that TOMS did not apply. The key reasons were:
What Qualifies as a VAT Invoice?
- For the first 28 nights: VAT at 20% is charged on the full room charge in the normal way
- From night 29 onwards: VAT at 20% is charged only on the non-accommodation element of the charge (i.e., meals, services, and facilities)
- HMRC requires at least 20% of the charge to be treated as facilities (reception, housekeeping, etc.), so the effective minimum VAT rate on the total charge from day 29 is 4%
- Any additional services, such as meals, parking, and laundry, remain fully standard-rated at 20% throughout
Binding Precedent
Unlike First-tier Tribunal decisions, an Upper Tribunal ruling creates a binding legal precedent for all UK taxpayers and HMRC. Accommodation businesses that have been using TOMS under the earlier Sonder First-tier ruling must now review their VAT accounting and account for VAT on the full selling price under normal VAT rules. Businesses that previously applied TOMS to accommodation under now-overturned interpretations (e.g., rent-to-rent models) may need to account for VAT on the full selling price, potentially including interest and penalties for under-declared VAT. Specialist advice is strongly recommended.
Sonder applied for permission to appeal to the Court of Appeal. However, reports emerged in early 2026 of Sonder’s insolvency in the United States, raising serious questions about whether the appeal will proceed. If it does not, the Upper Tribunal decision will stand as the definitive binding authority on this point.
TOMS Abolished for Private Hire and Taxi Operators (January 2026)
Separately, following the Autumn Budget 2025, the government legislated to exclude private hire vehicle and taxi operators from TOMS with effect from 2 January 2026. This change, confirmed in HMRC Revenue & Customs Brief 8 (2025), means that VAT-registered taxi and PHV operators must now account for VAT at 20% on the full fare rather than on their margin. This change does not directly affect hotel and accommodation businesses but signals the government’s broader direction in restricting TOMS.
What Remains of TOMS for Accommodation?
TOMS technically remains in UK law and still applies where its conditions are genuinely met. For accommodation, this would require a business that:
- Buys in accommodation as a genuine designated travel service (e.g. a traditional tour operator purchasing hotel beds wholesale from an unconnected hotel)
- Resupplies that accommodation to travellers without material alteration
- Acts as principal (not agent) in the supply chain
Standard hotel operators that own or lease their premises and sell directly to guests have never been within TOMS. They charge 20% VAT on the full room rate as usual. Following Sonder, the same now applies to serviced accommodation operators using the rent-to-rent model. HMRC has confirmed its view that accommodation supplied directly to guests is subject to VAT at 20% on the full price.
Any business that has been using TOMS for accommodation should seek specialist VAT advice immediately to assess its historic and ongoing VAT position.
Making Tax Digital for VAT
All VAT-registered businesses in the UK, including hotels and accommodation operators, are required to comply with Making Tax Digital (MTD) for VAT. This means businesses must:
- Keep digital VAT records using MTD-compatible software
- Submit VAT returns directly to HMRC via MTD-compatible software
- Maintain a digital audit trail of VAT transactions
MTD has been mandatory for all VAT-registered businesses since April 2022. Hotels and accommodation businesses with complex accounting systems (including property management systems, point-of-sale systems, and booking platforms) should ensure that their software integrates properly and submits accurate VAT data.
Zero-rated supplies are crucial for supporting essential needs and ensuring affordability for consumers. However, businesses must maintain accurate records to demonstrate eligibility for zero-rating when filing VAT returns.
Common Pitfalls and HMRC Compliance Issues
HMRC regularly identifies compliance risks in the hospitality sector. The most common VAT errors made by hotel and accommodation businesses include:
HMRC may undertake VAT inspections of hospitality businesses, particularly where turnover appears inconsistent with VAT declarations or where the business has not registered despite exceeding the threshold.
VAT and New Accommodation Developments
For developers and investors building or converting properties for use as hotels or accommodation businesses, VAT is a significant consideration during the development phase.
Zero Rate VAT
The construction of a new building intended for use as a hotel or accommodation is generally standard-rated (not zero-rated, which applies only to new residential dwellings). This means VAT at 20% is charged on construction services and materials.
However, a VAT-registered accommodation business can recover this input VAT through its VAT returns, provided the property is used to make taxable supplies. This makes VAT neutrality achievable for registered businesses.
Option to Tax
Owners of commercial property in the UK may choose to “opt to tax” a building or land. When an option to tax is in place, the owner must generally charge VAT on the sale or rental of that property.
However, the option to tax typically affects property transactions rather than hotel operators’ trading income. Hotel accommodation itself is already a standard-rated taxable supply, so the option to tax does not normally change the VAT treatment of room revenue.
Instead, the option to tax becomes relevant where a hotel building or commercial accommodation property is leased, rented, or sold between businesses. For example, a property owner who has opted to tax a hotel building would usually need to charge VAT on the rent charged to a hotel operator or on the sale price of the property, unless a specific VAT relief, such as the transfer of a going concern (TOGC), applies.
Hotel operators acquiring or leasing premises should therefore confirm whether an option to tax is in place, as this can affect the VAT treatment of the property transaction and the amount of VAT payable at the time of purchase or during the lease.
Key HMRC Guidance and Resources
Zero Rate VAT
Businesses seeking authoritative guidance on VAT in the accommodation sector should refer to the following HMRC publications:
- VAT Notice 709/3: Hotels and holiday accommodation (last updated August 2022, the primary reference guide; covers the reduced value rule for stays over 28 days)
- VAT Notice 709/5: Tour Operators Margin Scheme (under review following Sonder and PHV legislative changes)
- HMRC Revenue & Customs Brief 8 (2025): VAT TOMS supplies by private hire vehicle or taxi operators
- VAT Notice 742: Land and property
- VAT Notice 700: The VAT Guide (general principles)
- VAT Notice 700/21: Keeping VAT records
- HMRC v Sonder Europe Limited [2025] UKUT 14 (TCC): Upper Tribunal ruling on TOMS and serviced accommodation (January 2025)
These notices are available on the GOV.UK website and are updated periodically to reflect changes in legislation and HMRC policy.
Conclusion
VAT on hotels and accommodation in the UK operates within a well-established but rapidly evolving framework. The standard rate of 20% applies to most short-term accommodation, with the important 28-day reduced-value rule providing relief for long stays. However, this operates as a reduced-value calculation rather than a true exemption, and the supply remains taxable throughout.
The Tour Operators Margin Scheme, once seen as a significant planning tool for serviced accommodation operators, has been effectively closed off for most accommodation businesses following the binding Upper Tribunal ruling in HMRC v Sonder (January 2025), and has been legislatively abolished for private hire operators from January 2026. Any business that has been relying on TOMS for accommodation should take urgent specialist advice.
For accommodation businesses, proper VAT registration at the correct £90,000 threshold, accurate invoicing, and timely compliance with Making Tax Digital requirements are essential to avoid costly penalties. For business travellers and corporate clients, understanding the rules around input VAT recovery can deliver meaningful cost savings.
