Leisure & Hospitality VAT: 8 high risk areas businesses should review

The leisure and hospitality sector has faced a challenging few years. Rising wage costs, increased operating expenses and changing consumer behaviour continue to put pressure on margins. Against that backdrop, VAT is often seen as a compliance exercise rather than a strategic area of focus.

However, hospitality businesses frequently operate complex models involving accommodation, food and beverage sales, events, staffing arrangements, property portfolios and multiple legal entities. As a result, VAT errors can accumulate quickly and opportunities for additional recovery are often overlooked.

Eight VAT areas leisure and hospitality businesses should review in 2026

1. Deposits, no-shows and cancellation income

One of the most common VAT errors we encounter relates to deposits and cancelled bookings.

Many businesses continue to treat retained deposits and no-show fees as outside the scope of VAT. However, HMRC’s approach has evolved significantly in recent years and amounts retained following cancellations may still represent consideration for a taxable supply.

For hotels, restaurants, event venues and spas, this can create historic under-declarations where VAT has not been accounted for on retained deposits.

Businesses should review:

• Booking deposits
• Event deposits
• Restaurant reservation fees
• Cancellation charges
• No-show fees

Even relatively small deposits can create significant exposures when multiplied across thousands of bookings each year.

2. Getting the VAT tax point right

Advance payments often create earlier VAT liabilities than businesses expect.

Where customers pay in advance for weddings, accommodation, functions, memberships or events, VAT may become due before the service itself is provided.

We frequently identify situations where businesses are accounting for VAT when the service takes place rather than when the payment is received.

Whilst this may appear to be a timing difference, HMRC can assess interest on VAT that should have been declared earlier. Where the issue has existed over several years and across large volumes of bookings, the exposure can become significant.

3. Gift cards and voucher schemes

Gift cards remain hugely popular across hotels, restaurants, spas and visitor attractions.

However, the VAT treatment depends on whether the voucher is a single-purpose voucher (SPV) or a multi-purpose voucher (MPV). This distinction determines whether VAT becomes due when the voucher is issued or when it is redeemed.

Getting this wrong can result in significant under-declarations of VAT. We regularly see businesses treating vouchers as MPVs and delaying the accounting of VAT until redemption when, in fact, VAT should have been accounted for when the voucher was issued.

Complexities increase further where:

• One group company issues the voucher and another group company redeems it.
• Multiple brands or legal entities participate in the same voucher scheme.
• Vouchers expire unused.
• Voucher proceeds are transferred between different group companies.

In these situations, it is often unclear which entity has the VAT liability and whether the accounting treatment adopted is consistent across the group. This can lead to both under-declarations of VAT and difficulties reconciling intercompany transactions.

Voucher schemes can also create opportunities. Where businesses operate MPV arrangements and vouchers ultimately expire unused, there can be scope to revisit whether VAT has been over-accounted for or whether adjustments are available depending on the structure of the scheme and how the vouchers are administered.

Voucher arrangements are often implemented from a commercial perspective without fully considering the VAT implications. Given the volumes involved across many hospitality businesses, even small errors can quickly become material.

4. Online travel agents and accommodation platforms

Many hotels and holiday accommodation providers receive bookings through online platforms.

One of the most common errors we identify is businesses accounting for VAT on the net proceeds received rather than the gross amount charged to the customer.

The correct treatment depends on whether the business is acting as principal or agent and the contractual terms agreed with the booking platform. However, where businesses incorrectly account for VAT on the net amount received, this can result in a significant under-declaration of output VAT.

As these arrangements often process large volumes of bookings, errors can remain undetected for several years. When identified, businesses can face substantial historic VAT assessments together with interest and, in some cases, penalties. For accommodation providers operating with tight margins, the financial impact can be significant, particularly where the VAT cost cannot be recovered from customers retrospectively.

A review of booking platform arrangements, contractual terms and VAT accounting processes can often identify historic exposures before they become the subject of HMRC scrutiny.

5. Staff accommodation and residential exemptions

Labour shortages have resulted in many hospitality businesses providing accommodation to employees, seasonal workers and agency staff.

Whilst accommodation is often viewed as a staff welfare issue, the VAT treatment can have wider implications for both output tax and VAT recovery.

A key consideration is whether accommodation is provided free of charge or whether employees contribute towards the cost, either through direct payments or salary sacrifice arrangements.

Where accommodation charges are made, the supply may qualify as exempt residential accommodation. Whilst this can avoid the need to charge VAT, it may also restrict the business’s ability to recover VAT incurred on costs that directly relate to providing that accommodation.

This can be particularly relevant where businesses incur significant expenditure on:

• Staff housing
• Employee accommodation blocks
• Holiday park accommodation
• Seasonal worker accommodation
• Utilities, repairs and maintenance

In larger operations, providing exempt accommodation can also affect the wider partial exemption position of the business. Where accommodation income becomes significant, businesses may find that VAT recovery is restricted not only on directly attributable costs but also on a proportion of their overhead expenditure.

Given the increasing use of employee accommodation and salary sacrifice arrangements across the sector, this is an area that many businesses have not revisited for several years and one where both risks and opportunities can arise.

6. Intercompany recharges and Property Arrangements

As hospitality groups continue to grow through acquisitions and restructuring, intercompany transactions often become a source of VAT risk.

We regularly see:

• Head office costs recharged without VAT.
• Management charges not raised.
• Shared employee costs passed between entities without review.
• Property costs allocated incorrectly between operating and property companies.
• Assumptions that group transactions are outside the scope of VAT simply because the companies are under common ownership.

Unless entities are in the same VAT group, VAT often needs to be considered on these supplies.

Property arrangements can be particularly problematic. We frequently see operating companies incur expenditure that enhances the value of a property held by another group company, such as refurbishment works, fit-outs, extensions and other landlord-type costs. Without careful planning, this can create VAT leakage where the company incurring the costs is not receiving the benefit of the supply for VAT purposes.

The interaction between landlord and tenant entities also requires careful consideration. Where a property company has not opted to tax a property, subsequent recharges of rent, service charges or property-related expenditure can create restrictions on VAT recovery and, in some cases, an irrecoverable VAT cost for the group.

As groups expand, the original rationale for historic charging arrangements is often forgotten. A periodic review can help ensure management charges, property arrangements and intercompany recharges continue to operate in a VAT efficient manner.

 

7. Salary sacrifice arrangements and employee benefits

Many hospitality businesses have introduced salary sacrifice arrangements and employee benefits as part of their recruitment and retention strategies.

Common examples include:

• Staff accommodation
• Electric vehicles
• Cycle to work schemes
• Discounted meals and food packages
• Technology schemes
• Other employee benefits

Whilst often implemented from an employment or HR perspective, these arrangements can have important VAT consequences.

For example, where accommodation is provided in return for a salary sacrifice or other charge, the business may be making an exempt supply of residential accommodation. As discussed above, this can affect VAT recovery on related expenditure and, where the arrangements are sufficiently significant, may have a wider impact on the business’s partial exemption position.

Similarly, discounted staff meals and other employee benefits can create VAT liabilities that are not always identified when the arrangements are first introduced. We frequently find businesses accounting correctly for the payroll implications but overlooking the VAT consequences.

Although the VAT impact of any individual employee arrangement may appear relatively small, the cumulative effect across a large workforce can be significant. This is particularly relevant in sectors such as hotels, holiday parks and care businesses where accommodation and employee benefits form a key part of the remuneration package.

As labour costs continue to rise, businesses should ensure that salary sacrifice and employee benefit arrangements are reviewed not only from an employment tax perspective, but also from a VAT perspective.

 

8. Overseas services and reverse charge obligations

Most hospitality businesses now purchase services from overseas suppliers, including:

• Booking software
• Cloud platforms
• Marketing services
• SaaS subscriptions
• Digital advertising

Whilst these purchases may not contain VAT, this does not mean there are no VAT obligations. Businesses are often required to apply the reverse charge and account for output VAT as if they had supplied the services themselves.

For fully taxable hospitality businesses, the VAT is often recoverable in full, meaning the reverse charge is largely cash neutral. However, it still needs to be correctly reflected on the VAT return and we regularly identify businesses that have either failed to apply the reverse charge or have applied it incorrectly.

The position can be more significant for partially exempt businesses, where some of the reverse charge VAT may become irrecoverable.

For smaller businesses operating below the VAT registration threshold, overseas service purchases can create an unexpected VAT registration requirement, even where UK sales remain relatively low. As a result, businesses should review overseas supplier costs annually to ensure both compliance and any potential registration obligations are identified early.

This remains an area of regular HMRC scrutiny and one that is commonly overlooked because no VAT appears on the supplier invoice.

 

How AAB can help

Our leisure and hospitality VAT specialists regularly assist businesses with:

• VAT health checks
• HMRC enquiries and disclosures
• Voucher and gift card reviews
• Property VAT planning
• Partial exemption reviews
• Staffing and labour supply arrangements
• VAT recovery optimisation
• International VAT and reverse charge compliance

A VAT health check can often identify both historic risks and opportunities for additional recovery, providing businesses with greater certainty and, in many cases, a direct cash benefit.

With margins remaining under pressure across the sector, ensuring that VAT is being managed efficiently has never been more important. If you have any queries about the key areas to review, please do not hesitate to get in contact with Gabrielle Bird, or your usual AAB contact.