Firstly let’s clear something up. In the UK there is not and never has been a 4% VAT rate.
We actually only have 3 rates of VAT recognised by HMRC, which are; Standard rate (20%), Reduced rate (5%) and Zero rate (0%). If you want to correctly import your invoices from your booking system into your accounting software for your VAT return you should only ever use one of these three rates, unless instructed otherwise by HMRC.
The confusion seems to have come from the hospitality 28-night rule (VAT Notice 709/3) in which the part of the nightly rate that is for accommodation becomes VAT Exempt after the 28th consecutive night of a stay. As most Property Management Systems do not have the functionality to automatically deal with this reduction, the 4% VAT rate has appeared in the serviced apartment industry as a quick fix for property suppliers, who don’t fully understand the notice or don’t have time to apply the notice manually.
There is one fatal flaw in this approach though. As there is no 4% VAT rate recognised by HMRC all invoices that contain it are invalid. Also, if you have connected your Property Management System to your accounting software it too will not recognise a 4% VAT rate. This means your VAT return could be incorrect, especially now the government has introduced Making Tax Digital. This is because most accounting software will have predefined VAT rates set up for the standard rates and only these will be included on the VAT return calculations.
Where does 4% VAT come from then?
So where has the 4% VAT rate come from? The 28-night rule states that the facilities charge must be at least 20% of the original nightly rate. Whilst you should actually work out the correct percentage of your nightly rate that is for facilities charges (that’s a blog post for another day) almost all serviced apartment providers use 20% as this is the minimum charge.
20% of 20% is 4% …Voila! 4% VAT rate is born.
How the 28-night rule actually works
VAT Notice 709/3 states that after a continuous stay of 28-nights the charge for the accommodation part of a nightly rate becomes VAT Exempt, with Standard rate (20%) charged only on the facilities charges (etc. rent, electric, water, gas, cleaning). This means that when invoicing for this part of the stay you should have 2 separate lines on your invoice. One for the accommodation charge and another for the facilities charge with the correct VAT rate applied to each.
This also ensures that when you import invoices into your accounting software and complete your VAT return the correct information will be automatically populated for you. Although the accommodation charge is VAT Exempt it still has to be reported to HMRC.
How does Apartbook manage the VAT Notice 709/3?
Apartbook has been built from the ground up specifically for the serviced apartment industry. This means that we have taken the 28-night rule into consideration when creating our Rates and Invoicing functionality. Applying the correct VAT rates for long-stays is as simple as setting an option on your Rate. The system takes over from there applying the correct VAT rate when required.
If you have a booking that is longer than 28-nights, we will automatically split the sales lines on the invoice to reflect the correct charges and VAT rates if the booking is using a rate with the feature turned on. We’ve also made it easy to adjust the facilities charge percentage should you wish to, to reflect individual provider needs.
My customer is demanding to see a 4% VAT rate on the invoice.
There are stories of clients having invoices returned stating that it must have a 4% VAT rate on it after 28-nights. This is actually an incorrect demand. The invoices produced by the Apartbook software are correct in accordance with the guidelines from HMRC. You may, therefore, push back with the confidence that your invoices are correct. Explaining that a 4% VAT rate does not exist and that the 2 sales lines on the invoice of VAT Exempt and 20% VAT for facilities charge represent the “4% VAT rate”.
Then along came the Covid-19 VAT reduction
On 8th July 2020, the UK government announced that the Standard rate of 20% would drop to 5% for accommodation services, among others, between 15th July 2020 and 12th January 2020.
This has caused a lot of confusion in the industry about how to apply the 28-night rule to this VAT reduction. Do we still charge 4% after 28-nights? Do we charge 1%? Actually, when it comes to the 28-night rule nothing has changed. A minimum of 20% of the original rate must be charged at the Standard rate (now 5%) as a facility charge, whilst the accommodation charge should be VAT Exempt.
To make this easier for our customers, again, we’ve made this automatic in Apartbook. You just need to enable the “Covid-19 VAT reduction” flag on your Rate and the system will automatically apply the VAT reduction to all nights that fall between 15th July 2020 and 12th January 2021, whilst also applying the 28-night ruling to applicable bookings.
We’ve put together some videos to walk through the processes of enabling and using these features in Apartbook.
It’s time to move the industry forward
At Apartbook we believe it’s time for the Serviced Apartment industry to move forward when it comes to technology and software. That’s why we are working hard to ensure that the system supports all the nuances and bugbears of the serviced apartment industry that other Hotel Property Management Systems have missing. We are busy creating bespoke functionality for the industry to help providers in their day to day tasks and to ease the process of running a serviced apartment company efficiently and to government guidelines.
If you are interested in discussing our software further, feel free to get in touch with a member of the sales team who will be happy to further demo the features of our system.