Hospitality sector should review systems ahead of new VAT rate

Hospitality business owners should review how they apply VAT rates to bookings they accept now for events that will take place after July 1st

Dave O'Brien, head of tax with Xeinadin, pictured at the accountants and business consultancy's office in Blackpool, Cork. Photo: Michael O'Sullivan /OSM PHOTO

Hospitality sector business owners need to review their systems now to avoid future confusion over the VAT rate to be applied to advance bookings.

Dave O'Brien, head of tax at accountants and business advisers Xeinadin, says there has been an understandable welcome among hoteliers and others who are to enjoy a reduced VAT rate from this summer onwards.

The VAT rate on food, catering, and hairdressing services is currently 13.5%. This rate is scheduled to be reduced to 9%, effective from July 1.

Mr O’Brien, who is also president of the Cork Business Association, also welcomes this VAT rate reduction. In this Q&A interview, however, he also advises business owners to review their systems as soon as possible, notably in relation to how they apply VAT rates to bookings they accept now for events that will take place after July 1st.

How might changes to the hospitality sector VAT rate create issues for business owners in the months ahead? 

It’s a little more complicated than it might seem. For SMEs, it really depends on how a business accounts for VAT, either on an invoice basis or a cash basis. With one method, VAT is recorded when an invoice is issued, while with the other, it is recorded when the payment is received.

For some businesses, such as hairdressers, this can be relatively straightforward. Most customers pay immediately after the service, so the VAT applied is simply the rate in place at that time.

However, for businesses like hotels that take bookings for events well in advance, it can become more complicated. As a result, the next few months may create some practical challenges for hospitality businesses, especially where bookings and payments happen months or even years in advance.

Should hospitality business owners have specific concerns around advance bookings for weddings and other events? 

Yes, they should, as the situation is not always straightforward, particularly now that the VAT rate for room rental has increased to 23%, which adds another layer of complexity.

As mentioned above, it really depends on how a hotel or venue accounts for VAT. Most larger hotels account for VAT on an invoice basis, while some smaller venues may use the cash basis for accounting for VAT.

For hotels using the invoice basis, the VAT rate that applies will depend on when the invoice is issued (or when it should have been issued).

A prime example is a hotel booking for a wedding. A couple might book a hotel in March 2026 for a wedding in July 2027. The VAT rate in March may be 13.5%, while the rate in July 2027 could be 9%. If the hotel issues an invoice before July 2026, the 13.5% VAT rate will apply, even though the wedding itself takes place the following year. Hotel owners need to understand that and take it into consideration.

In most cases, hotels will require a deposit or down payment, and this should normally be supported by an invoice. This means the deposit could be charged at 13.5% VAT, while the remaining balance might be charged at 9%, depending on when the invoice for the balance is issued. This can create some complications, but careful planning around deposits and invoicing can help reduce the impact.

The increase in the room hire VAT rate to 23% adds further complexity. In many cases, the 9% rate may only apply to the food element, while the room hire would be charged at 23%. There may be an argument that the food is the main service and the other elements are secondary, which could allow the 9% rate to apply more broadly, but that position may be difficult to support. As a result, hospitality businesses may need to review how they price and structure their packages to make sure the correct VAT rates are being applied.

What are the implications for those working in the sector?

The finance teams or the person designated to handle the financials will need to stay on top of these changes. They should get clear guidance from their accountants and make sure that guidance is followed.

Owners and managers also need to be aware of issues such as credit notes. For example, if a credit note is issued in December for an invoice that was originally issued in June, the credit note must reflect the VAT rate that applied at the time of the original invoice. This makes sense from a VAT perspective, but it is something owners should keep in mind when managing cashflow.

Having good systems in place will make this much easier to manage and reduce the risk of mistakes.

What advice do you have for owners on what they need to do now to avoid issues down the track?

The industry has seen VAT rate changes before, so this is not new. Make sure the systems are picking up the basics. Make sure the person agreeing pricing is aware of the differences along with the finance team and management. It would also be worthwhile doing a review after the 3rd quarter of this year to ensure the new rules have been factored into decision making and internal systems.

Overall, this is positive news for the industry, but businesses need to be careful to apply the rules correctly to avoid any issues with Revenue.