Looking back at key tax updates in the UK hotel, hospitality & leisure sector

The COVID-19 pandemic has created a challenging environment for the UK hotel, hospitality & leisure sector. As the industry starts to recover, we provide a recap on several key changes to the UK tax rules over the past few years that have had an impact on businesses operating in this area.

VAT and business rates

To support businesses that were affected by forced closures and social distancing measures during the COVID-19 pandemic, the UK government allowed a temporary reduced VAT rate of 5% to be applied to certain supplies of food and non-alcoholic drinks, accommodation and admissions to attractions between July 2020 and September 2021. This went up to 12.5% from October 2021 and returned to the pre-pandemic rate of 20% as of April 2022.

Retail, hospitality and leisure relief has replaced the retail discount for business rates and extends the 50% discount to the 2022-23 tax year for eligible businesses, up to a total value of £110,000 per business. In addition, the UK government announced further changes to the business rates system in the October 2021 Budget, including its intention to implement an “improvement relief” from 2023 that will allow businesses to make property improvements and pay no extra business rates for 12 months.

While such measures are to be welcomed, the rise in VAT rates (and, in due course, and business rates) to pre-pandemic levels will create additional hurdles on the road to recovery for organisations in this sector.

IR35

Changes to the off-payroll working rules (“IR35”) that came into effect on 6 April 2021 will have affected organisations, including in the UK hotel, hospitality and leisure sector, engaging the services of workers through personal service companies ("PSCs").

To increase compliance with the IR35 rules, these changes mean that private sector end user clients are now responsible for assessing the employment status of the off-payroll contractors they engage to determine whether the relationship between the individual and the business would be one of employment, ignoring the presence of the PSC. Where there is a deemed employment relationship, the end user must account to HMRC for Income Tax and National Insurance contributions (NICs) (both employer and employee) on any fees it pays to the intermediary (excluding VAT).

This only applies to medium and large businesses as small businesses remain outside the tax charge. Small businesses are those with two of: 50 or fewer employees, less than £10.2m in turnover or less than £5.1m in balance sheet value. The small business exclusion applies to the end user or the deemed employer but not to any intermediaries in the chain.

HMRC v Fortyseven Park Street

Timeshare apartments are an increasingly popular offering in the hotel space, but the 2019 Court of Appeal decision in HMRC v Fortyseven Park Street could make them much more expensive. In the past, suppliers of time shares treated them as supplies of land which are exempt for VAT purposes. However, the Court of Appeal found that the supply of ‘fractional interests’ in a residential building with the provision of concierge services was not a VAT exempt supply of land, meaning that VAT should have been charged in addition to the fees.
The case is of interest for anyone supplying timeshare apartments, especially when they previously treated them as a VAT exempt supply of land, and businesses should check whether the key factors in this case (i.e. short-term stays and the provision of hotel-like services) are applicable to them.

Read our summary of the case here.

Non-resident capital gains tax

Since April 2019, non-residents (including non-UK resident companies) have been subject to UK tax when they sell any UK property. This measure extended the previous rules that applied only to residential property so that disposals of UK hotel and leisure properties owned by non-UK residents are now within scope.

The measure widened the scope of the UK’s tax base with regard to disposals of immovable property by non-residents in two key ways:

  • all non-resident persons’ gains on disposals of interests in UK land are now chargeable; and
  • indirect disposals of UK land are chargeable.

The indirect charge applies in situations where a non-resident disposes of an interest in a “property rich” entity (“the envelope”) and at the date of disposal, or at any point in the five years prior to that date, the non-resident holds, or has held, a 25% or greater interest in the envelope. This holding may be held directly or through a series of entities. “Property rich” is defined as where an "envelope" derives 75% or more of its gross asset value from UK immovable property (residential or non-residential).

Existing reliefs and exemptions apply to non-residents as they do for residents, with certain modifications. There is also a trading exemption so that disposals of interests in property rich entities that are trading before and after the disposal will not be chargeable disposals where the land is used in the trade. This is likely to apply where, for example, a non-UK resident disposes of shares in a hotelier which owns a significant value of hotels.

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