The Hotel & Leisure (H&L) sector is comprised mainly of the following subsectors: tourism and tour operators, hotel industry, airlines etc. The scope of Hotel & Leisure services under these sub sectors is quite broad and may include:
- Tour packages
- Transport services
- Hotel accommodation services
- Restaurant meals
- Ticketing fees
- Entertainment fees (internet, telephones, televisions); recreational fees (special functions, parties); and other conferencing activities, exhibitions etc.
- Service charges
- Agency services
It is important to determine the specific VAT treatment of each of these supplies (revenue streams) to ensure VAT is charged and reported correctly in compliance with the legislation.
Place and time of supply
Technological advancements have allowed people to reserve online hotel rooms, tour packages, etc. which has helped evolve the H&L industry. However, this has made identifying the place where the services are performed and consumed, and the subsequent VAT treatment more complex.
In addition, the technological advancements such as payment by use of electronic cards i.e. credit/debit cards have made identifying the time of supply of the services complicated and as such determination of the tax point a challenge. Usually, VAT on the supply of taxable services is due on the earliest of issuance of an invoice, payment is received (including part payment) or service is performed
Let’s have a look at the challenges in determining the VAT treatment:
- Arrangements with travel agents and other intermediaries:
Determining the correct VAT treatment of the transactions involving agents. Usually, the VAT treatment of these arrangements will depend on the relationship with the customer such as, a travel agent acting as an intermediary or a principal.
- Tour packages:
Usually foreign tour operators offer packages combining several components including accommodation, tour guiding, tour brokerage, transport, etc. Therefore, the tour operators will need to determine the correct VAT treatment for the various components of these transactions.
- Tips and service charges:
It is common practice in the H&L industry for an extra charge (tip/service charge) to be levied for serving customers in restaurants and hotels. The extra charge is normally accumulated and distributed to the workers in addition to their salaries. Tips/service charges given voluntarily by guests or customers to a hotel’s staff as a token of appreciation for services rendered are excluded from consideration for the supply and as such not subject to VAT
- Cancellation, no-shows, refunds, etc.:
It is common in the hotel industry for guests to cancel bookings or not show up and seek a refund. In such cases, most hotels usually charge a fee. What is the hotel supplying to the guest in return for the fee? Ensuring the correct VAT treatment is applied is crucial in order to avoid disputes with your guests.
- Short term vs long term accommodation:
Hotels usually provide short term accommodation (up to 30 days) and for long term accommodation (6 months) to their guests. In most jurisdictions, short term accommodation is taxable while long term accommodation is exempt. This means that VAT incurred on common costs and general overheads will not be fully claimable and would need to be apportioned.
- Pre-booking / prepayment arrangements:
Determining the correct VAT treatment where deposits are paid in advance or where a deposit is paid as a security and is refundable.
- Loyalty reward programs and other business promotions and offers:
Many hotel chains own a loyalty program that allow guests to earn points and redeem them for discounted or free stays. Determining the correct VAT treatment where the reward scheme allows for points to be redeemed with third party redeemers could be a challenge.
- Other ad hoc supplies:
Currency exchange, recharge of telephone calls, compensatory payments, etc.
IT infrastructure assessment
The capabilities of the IT infrastructure including reservation systems and re-configurations need to be assessed in order to generate VAT compliant outputs. In many cases, significant changes will be required to IT platforms and existing workflows and processes.
The challenges discussed above are just a sample of many issues that will impact H&L companies under VAT.
It is essential that your staff are fully cognizant of VAT. It will be difficult to ‘systemize’ the VAT rules for all supplies made by you: nuances in the VAT law or slight changes in fact scenarios can lead to varying VAT outcomes, as described above.
We, at N R Doshi and Partners have a strong indirect tax team with many years of experience in VAT matters impacting H&L players, both in the Middle East and abroad, and we are in an excellent position to support you through this transitional period. Reach us out on email@example.com
By CA. Milind Modi – Asst. Manager at N.R. Doshi & Partners