VAT continues to be one of the most significant, and often most challenging, areas of tax compliance for hospitality businesses. With the sector already operating on tight margins, even small shifts in VAT policy or HMRC interpretation can have a meaningful impact on pricing, profitability and cash flow. This is particularly true at a time when operators are balancing rising labour costs, increased energy prices and continued sensitivity from consumers around pricing and value for money.

With 2026 arriving, the VAT landscape is particularly relevant for hospitality operators with a combination of headline grabbing cases (for example M&S - VAT liability of Strawberry Cream Sandwich), complex VAT administration, as well as HMRC’s increasing focus on VAT compliance checks. High profile cases such as this serve as a reminder that HMRC is prepared to challenge long established practices where it believes the VAT treatment does not reflect the commercial and economic reality of the supply.

Why VAT matters more than ever for hospitality

Hospitality businesses face a uniquely complex VAT profile. Multiple rates, bundled supplies, service charges, digital ordering platforms and frequently complex property arrangements all create areas of risk. At the same time, a debate is ongoing within the hospitality industry for the government to introduce a permanently reduced VAT rate, similar to EU countries to support competitiveness and recovery. For many hospitality operators, VAT decisions are no longer confined to the finance function but strongly influence commercial strategy, menu design and pricing structures.

Against this backdrop, operators should be paying regular close attention to how HMRC is applying existing VAT rules, how case law is evolving and what upcoming policy changes may mean for their operations. Failure to do so can result in unexpected VAT liabilities that crystallise years after decisions were made, often at the point when cash flow is already under pressure.

Key VAT developments affecting the sector

1. Mixed and bundled supplies

Throughout 2025, HMRC has been steadily increasing the number of VAT compliance checks performed. In the hospitality sector, HMRC typically focus on whether a business correctly distinguishes between standard rated and zero-rated elements of their supplies. For example, by reviewing the VAT treatment of:

  • eat in vs takeaway supplies
  • meal deals and promotional bundles
  • events, experiences and packages and associated pricing
  • accommodation with ancillary services. 

Inconsistent treatment and/or aggressive planning can potentially lead to penalties and interest being charged by HMRC. In practice, issues often arise not from deliberate inaccuracies but from inconsistent VAT treatment across different sites, systems or teams. Therefore, it is key that proper records are maintained, VAT advice is sought on complex matters and VAT positions are regularly reviewed to ensure they remain appropriate as the business evolves.

2. Service charges and discretionary payments under continuing scrutiny

As labour costs rise, many operators may revisit their policy on service charges. HMRC may challenge situations where:

  • ‘discretionary’ service charges are presented in a way that appears mandatory
  • service charges are bundled into fixed price menus. 

How these charges are described on menus, receipts and booking platforms can be just as important as the underlying contractual position. Where customers reasonably perceive a charge to be compulsory, HMRC may argue it forms part of the taxable consideration.

3. Property related VAT issues 

With many hospitality businesses renegotiating leases, acquiring new properties or investing in refurbishments, VAT on property continues to be a key area of VAT risk. Issues to consider include:

  • whether landlords have opted to tax
  • VAT recovery on fit out and refurbishment costs
  • treatment of rent-free periods and incentives
  • Capital Goods Scheme adjustments.

Given the sector’s reliance on leased premises, even small VAT accounting errors can have long term consequences. Incorrect VAT treatment can result in irrecoverable VAT on costs or clawbacks years later, directly impacting business cash flow and the overall return on investment for new sites or refurbishments.

4. Wider VAT policy changes on the horizon

While the government has not announced a sector specific VAT rate change, VAT remains a live policy issue. An ongoing hospitality sector campaign debates the benefits of a reduced VAT rate to support competitiveness and consumer affordability. Although any VAT rate change may be outside individual operators’ control, awareness of potential developments allows businesses to efficiently plan and model different scenarios.

It is therefore imperative for hospitality operators to stay alert to consultations and HMRC VAT guidance updates.

What hospitality operators should be doing now

In an environment of increased scrutiny, proactive management of VAT can act as both a risk mitigation tool and a support for better commercial decision making.

  • Review VAT treatment across all revenue streams: from food and beverage to events, accommodation and digital ordering, operators should ensure VAT treatment is consistent across different sites and teams, documented and defensible. This includes reviewing historic positions where practices may have evolved organically over time.

  • Strengthen internal controls and training: front of house teams, finance staff and managers all play a role in VAT compliance. Clearly documented processes reduce risk. Simple operational guidance can help ensure VAT is applied correctly at the right time.

  • Engage early with landlords and suppliers and seek professional VAT advice on complex and high value arrangements: property related VAT issues often arise from misunderstandings that could have been avoided with early communication. Early engagement can also help avoid delays to projects and unexpected VAT costs.

Navigating VAT complexity

While VAT can feel like a compliance burden, businesses who establish clear processes to deal with their VAT affairs realise that this contributes to effective management due to:

  • enhanced financial transparency
  • reduced risk of costly VAT assessments
  • supporting stronger relationships with investors, lenders and landlords
  • confidence and awareness of the VAT implications when expanding or refurbishing sites. 

In many cases, a well-managed VAT position supports wider growth objectives and provides reassurance to stakeholders.

How we can help

Our VAT specialists work together with businesses across the UK to assist with:

  • VAT reviews and risk assessments
  • VAT treatment of bundled supplies and service charges
  • property related VAT planning
  • HMRC VAT enquiry support.

With experience across the hospitality sector, we understand the practical challenges operators face. If you’d like to understand how VAT affects your own business, or if you would like a review of your VAT accounting position, we would be delighted to help.

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