Hot in hotels: current VAT issues – Promotional schemes

Many hotel businesses operate various types of promotional programmes to both reward returning patrons and to promote the business with new customers. Given the VAT rules in this area are constantly evolving, it is important for hotels to regularly review the VAT treatment of promotional schemes to ensure that they remain VAT compliant, avoid pitfalls and identify VAT saving opportunities in light of the changing VAT landscape.

The three primary areas affected are cashback payments to customers, loyalty points reward schemes and the treatment of certain vouchers.


There is a significant VAT saving opportunity where hotels provide a cashback to customers in connection with bookings made via cashback websites. If the hotel uses cashback websites to promote the business then it is highly recommended that the nature of payments back to customers and the underlying contracts with cashback websites are reviewed to determine whether a reclaim of VAT from HMRC is available.

Points reward scheme

Where hotels operate loyalty schemes under which customers can redeem points for rewards from other parties (the 'redeemer'), historically, HMRC has denied recovery of VAT on payments by the hotel to the redeemer, as it considered that the supply of goods or services was made to the customer, rather than the hotel. However, a recent decision at the Supreme Court involving Aimia (formerly, Loyalty Management UK) challenged HMRC’s policy. As a result, Aimia was able to reclaim VAT incurred on payments to redeemers.

Although the key principles of VAT recovery have not changed following the Supreme Court’s judgment, it has provided an opportunity for businesses operating loyalty schemes to examine their contracts to determine whether or not VAT can be reclaimed from HMRC on such payments. If not, the contractual framework should be reviewed to determine whether the loyalty scheme may be operated in a more VAT efficient manner.

Single purpose vouchers (SPVs)

SPVs are face value vouchers that carry the right to receive only one type of goods or services which are all subject to a single rate of VAT. For example, vouchers which can only be redeemed at the hotel’s restaurant or those which can only be redeemed for hotel accommodation. Following the judgment by the European Court in Lebara in relation to the sale of pre-paid phone cards, HMRC issued new anti-avoidance measures in connection with the sale of SPVs.

The implications of a voucher being classified as a SPV are twofold. Firstly, there is a cash flow disadvantage because unlike general face value vouchers, VAT must be accounted for to HMRC upfront at the time the SPV is sold (regardless of whether the voucher is issued by the person from whom it can be redeemed or by a third party). Secondly, unlike general face value vouchers, VAT must be accounted for even if the SPV is never redeemed by the customer. Accordingly, it is advantageous to ensure vouchers sold by hotels do not fall within the definition of SPVs. Fortunately, under current HMRC policy there is some flexibility to structure vouchers so as not to be caught by these new anti-avoidance rules.

If you think you might be affected by this issue please contact Nick Warner or Mustafa Sikandary to arrange a free 'Risks & Opportunities' meeting.