Key VAT Risks:

• VAT incorrectly charged by suppliers on temporary accommodation, particularly for stays over 28 days.
• Irrecoverable VAT costs where authorities pay VAT they are not entitled to reclaim.
• Over-claimed VAT recovery, creating exposure to HMRC challenge, backdated assessments, interest, and potential penalties.
• Small errors can accumulate, resulting in significant financial exposure across multiple service areas.

There is an emerging VAT issue affecting local authorities and other public sector bodies in relation to temporary accommodation arrangements. This includes (but is not limited to) accommodation provided for homelessness purposes, particularly where accommodation stays exceed 28 days.

Authorities face a significant VAT risk, as suppliers are applying VAT inconsistently. In some cases, VAT is charged where it should not be, and authorities may not be aware of the correct treatment. If invoices are processed without confirming the VAT liability, there is a risk that authorities could pay VAT that cannot be recovered or reclaim VAT they are not entitled to, potentially leading to backdated HMRC assessments, interest, and penalties.

With temporary accommodation being used increasingly across different service areas, even small errors can accumulate into significant financial costs.

The 28-day rule

Under the VAT rules for hotels, guest houses and similar establishments, supplies of sleeping accommodation are normally standard-rated. However, where a person occupies accommodation for a continuous period of more than 28 days, special VAT rules apply.

Once the 28-day threshold is exceeded:

• The stay is treated as longer-term accommodation from day 29 onwards.
• VAT is chargeable only on the taxable facilities element of the supply.
• Legislation provides that the facilities element must not be less than 20% of the charge, but the actual percentage will depend on the accommodation provider’s specific circumstances.
• The reduced valuation applies from day 29 onwards and does not apply retrospectively to the first 28 days.
• Certain charges that are closely linked to the accommodation, such as utilities or cleaning, may follow the VAT treatment of the main supply depending on the facts.

The reduced valuation is intended to reflect the shift away from short-term hotel-style accommodation towards longer-term occupation.

The responsibility for determining and supporting the appropriate facilities element rests with the accommodation provider.

Current issues identified

This issue was raised at the recent Land & Property Liaison Group (VAT) meeting, where concerns were highlighted around inconsistent VAT treatment by accommodation suppliers. In practice, suppliers are adopting differing approaches, including applying standard-rated VAT to the full charge even where the occupation exceeds 28 days, rather than applying it only to a reduced taxable element.

A key concern for local authorities is that, even where VAT is shown on supplier invoices, it may be incorrectly charged. In such cases, local authorities are generally unable to recover the VAT, resulting in an irrecoverable cost.

It was also noted that HMRC is currently considering assessing at least one local authority for incorrectly recovering VAT where the supplier had charged it in error. This reinforces HMRC’s position that the right to recover VAT depends on the correct VAT liability of the underlying supply, rather than solely on the VAT shown on the invoice.

Worked example

A local authority places an individual in hotel accommodation at a cost of £100 per night, with continuous occupation for 40 nights. In this example, the accommodation provider determines that the taxable facilities element is 20% of the charge.

• Days 1–28
  £100 × 28 nights = £2,800
  VAT at 20% applies to the full amount = £560 VAT
• Days 29–40 (12 nights)
  £100 × 12 nights = £1,200
  Only 20% of the charge (£240) is subject to VAT
  VAT at 20% = £48 VAT

If the hotel charges VAT at 20% on the full £4,000 (£800 VAT), £192 of that amount would be VAT charged incorrectly and is not legally recoverable by the local authority.

If supplier invoices are processed without checking whether the VAT charged is actually correct, there is a high risk that the authority will reclaim VAT it is not entitled to. HMRC can refuse recovery even where VAT appears correctly shown on an invoice, and may seek to recover the VAT through backdated assessments, interest and penalties.

As the use of temporary accommodation continues to increase across different service areas, small VAT errors can quickly add up. If the 28-day rules are applied incorrectly on a regular basis, this could result in significant costs, including VAT that cannot be recovered and the risk of HMRC asking for money back following a review or audit.

Recommended actions

• Review temporary accommodation arrangements, particularly where occupation exceeds 28 days.
• Identify cases where VAT continues to be charged on 100% of the accommodation charge beyond day 28.
• Ask suppliers to confirm that the long stay rules have been considered and that the VAT charged reflects the correct VAT liability of the supply.
• Challenge VAT treatment where there is no evidence that the long stay rules have been applied, and seek clarification or corrected invoices where appropriate.
• Ensure VAT recovery positions are robust and supported by the correct underlying VAT treatment.

Contact the PSTAX team