Hoteliers face prospect of VAT boost following European Court ruling

Hoteliers could be in line for a bumper VAT bonus following a ruling by the European Court regarding no-shows.

Before the decision, the UK tax authorities took the view that when a guest with a reservation fails to turn up or contact the hotel to cancel his or her booking, the guest still had a right to use the room. This, argued HM Revenue & Customs (HMRC), meant that the room had been supplied and the money the hotel received should be subject to VAT as normal.

However, the European Court ruling states that such income should be treated in the same way as forfeited deposits.

Barry Laurie, tax partner in the Edinburgh office of chartered accountants French Duncan LLP, who works with hotel groups, said: "The decision means that although VAT is charged as normal when the money is received, as soon as it becomes clear that is effectively a cancellation charge the VAT can be reclaimed."

HMRC has now accepted the change, which could open the door to thousands of claims for VAT rebates stretching back as far as four years.

"It is now recommended that hoteliers should go back over their books and check where VAT has been paid on no-shows to determined how much overpriced tax they were due," said Laurie.

"Since this decision radically alters the tax status of cash received by hoteliers for no-shows, it is important that they scrutinise their records for the past years and prepare a properly documented claim.

"Hoteliers should also be checking cases where deposits have been forfeited as a result of a booking cancellation because the court ruling means that they are effectively compensation, and thus outside the scope of VAT."

The ruling could also apply to cancelled restaurant bookings, as long as the table is not specific and the charge represents compensation for breach of contract.

"However, I would expect HMRC to challenge this treatment as the case was in respect of hotel bookings and they don't tend to see the wide picture without a fight," added Laurie.

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By Janet Harmer

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