Hot in hotels: current vat issues – Optional room service charges and other gratuities

It is a well-established principle that for a gratuity to be regarded as outside the scope of VAT, it must be genuinely optional for the customer. This means that if it is stated on the menu (i.e. the time of the contract being offered) that a service charge is discretionary, then any tip given will not be liable to VAT, even if it is automatically included on the food bill.

Applying a similar principle to accommodation, if a hotel does intend to suggest to a customer that he or she may wish to pay an optional service charge, then this needs to be made clear before a room is booked, in particular if it is advertised through an on-line comparator site. The alternative is not to automatically include it on the room bill, and make it clear to the customer that it is optional before any payment is taken. This could mean delays at checking out time, and less chance of collecting the gratuity.

Staying on the subject of gratuities, if the hotel makes a charge to the employees for gratuity administration, then HM Revenue & Customs (HMRC) usually regard this as a taxable supply at 20% VAT.

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