Hospitality and Leisure Tax Case Studies

Cases reviewed by Hussein Bhaiji FCCA CTA, Managing Partner. Last updated October 2026.

Hospitality runs on tight margins, so tax mistakes hurt more here than almost anywhere else. These six hospitality tax case studies cover VAT on gift cards and cancellation fees, capital allowances on a pub fit-out, the hot food rules, holiday let relief, and tronc and service charge VAT, and what fixing each one was worth. Client names and some details have been changed to protect confidentiality.

The sector has its own VAT and employment tax rules, and they change often. In each case the saving came from applying those rules to the client’s actual contracts, menus and payroll.

VAT on gift cards and vouchers: terms rewritten, and the VAT on unredeemed cards disappeared

The issue. A restaurant group sold £420,000 of gift cards a year and accounted for VAT on every one at the point of sale. Around 8% were never redeemed. On those cards the group was paying VAT on income for which it never supplied anything, roughly £5,600 a year, and it was paying VAT on all of it months before the meal was ever served.

What we did. The VAT treatment of a voucher turns on its terms, and the terms had never been looked at. A card that can only be used against standard-rated food and drink at UK sites is a single-purpose voucher, because both the place of supply and the rate are known when it is issued. VAT is due on issue, and if the card is never redeemed there is no refund of that VAT. Change the terms so the card can also be used against the group’s zero-rated retail lines and its cookery school, and it becomes a multi-purpose voucher. Issue and transfer up to face value are then not supplies, VAT arises only on redemption, and there is no VAT at all on the value that is never redeemed. We redrafted the terms and conditions, checked the change against the group’s distributor contracts so that the redemption value could be evidenced, and briefed the EPOS provider.

The outcome. VAT of £5,600 a year on unredeemed cards removed permanently, and the VAT on the remaining £386,400 of cards, around £64,400 a year, now paid when the card is used rather than when it is sold, which keeps about £14,000 more cash in the business on average across the year.

Four years of cancellation fees coded as “compensation, outside scope”

The issue. A hotel and events venue treated cancellation fees, retained deposits and no-show charges as compensation outside the scope of VAT. Over four years that came to £310,000 of income with no output tax. HMRC opened a VAT compliance check.

What we did. HMRC’s revised policy treats these payments as consideration for the right to benefit from the contract, not compensation, and VAT is due on them. Calling a charge compensation in the terms and conditions does not change the analysis. Revenue and Customs Brief 2 (2022) required businesses to adopt the revised treatment of early termination and cancellation fees by 1 April 2022. HMRC’s hotel guidance had treated cancellation fees as taxable for longer than that, but the venue’s contracts were for events and room hire packages that had been run under the general early termination guidance, and HMRC accepted that the periods before 1 April 2022 should not be reopened. That took the cancellation fees for the first year of a four-year assessment off the table before we argued anything else. Retained deposits and no-show charges are on a different footing, because HMRC brought them into charge from 1 March 2019 under Revenue and Customs Brief 13 (2018), so they stayed in the assessment for the whole period. After that we concentrated on the two places where money could still be saved. First, we separated out the genuine damages payments, where the venue had suffered an actual loss on a breach and was not supplying anything in return, which stand outside the scope on a proper analysis. Second, we disclosed the issue before the officer reached it, and supported it with full evidence and explanations of how the treatment had arisen. We then reworked the booking terms so the treatment is clear on the face of the contract and the EPOS coding matches it.

The outcome. The assessment came down from £52,000 to £33,000 of VAT. Because the disclosure came after HMRC had opened its check, the minimum penalty would normally have been 15%. HMRC refused to accept a reasonable excuse, but after detailed representations it agreed a special reduction under paragraph 11 of Schedule 24 Finance Act 2007, on the basis of our assurance that the business’s future returns would be reviewed before submission. No penalty was charged. The venue’s booking terms and accounting treatment now line up.

Pub group refurbishment: £310,000 of capital allowances identified

The issue. A pub group spent £1.4m refurbishing three sites. Its previous accountant capitalised the lot as leasehold improvements and claimed nothing beyond a small figure for loose furniture.

What we did. A building is not plant, but a long list of things inside it can be. We went through the specification against the statutory list and the case law. The decorative scheme, murals and prints qualified, following the House of Lords in CIR v Scottish and Newcastle Breweries Ltd [1982] STC 296, because creating atmosphere is a function of a hospitality trade. So did the cold rooms, the trade drainage, the fire alarm and sprinkler system, the sound insulation and the moveable partitions. Fixed wall panelling did not, because the Upper Tribunal in J D Wetherspoon plc v HMRC [2012] UKUT 42 (TCC) held that panelling of that kind had become part of the premises. Nor did the blockwork toilet cubicles or the general wall tiling in the toilet areas, although the demountable partitions and the splashbacks around the basins did qualify. The electrical and lighting systems, including the decorative light fittings, the powered ventilation and air cooling, the cold water and the heating all went into the special rate pool as integral features. We apportioned the preliminaries on a pro rata basis, which is the approach the Upper Tribunal endorsed in Wetherspoon. We left out the pre-construction surveys and studies. On 15 April 2026 the Supreme Court held in Ørsted West of Duddon Sands (UK) Ltd v HMRC [2026] UKSC 12 that such costs are not expenditure on the provision of plant, because section 11(4) CAA 2001 requires a close connection between the spending and the plant itself.

The outcome. £310,000 of plant and integral features identified from a £1.4m spend, worth £77,500 in corporation tax at the 25% main rate. Most of it was covered by the annual investment allowance in the year of spend, and the rest is being relieved through the special rate pool. More capital allowances cases are on our corporation tax reliefs and capital allowances case studies page.

Hot meals to care homes, and the website that became HMRC’s evidence

The issue. A contract caterer delivered cooked meals to care homes and workplace canteens in heated trolleys. It had treated the supplies as zero-rated food. HMRC assessed £165,000, covering about 18 months of supplies, on the basis that it was supplying catering.

What we did. Food is hot food, and therefore standard rated, if it is above the ambient air temperature when it is provided and any one of five conditions is met. Those conditions include heating it so it can be eaten hot, keeping it hot, supplying it in packaging that retains heat, and marketing it in a way that indicates it is supplied hot. On these facts the hot food conditions were met, but HMRC had a stronger point: a supply in the course of catering is standard rated whatever its temperature, and in Slice of Pie Limited v HMRC [2026] UKFTT 39 (TC), decided in January 2026, the First-tier Tribunal held that hot meals delivered to nurseries for immediate consumption were catering. What made it worse was the client’s own website, which promised meals delivered hot and ready to serve. Its own marketing copy was the evidence against it. We could not win the past, so we advised the client accordingly and made a disclosure. For the future, we worked out which lines could genuinely be supplied chilled and repriced them, and rewrote the website copy for those lines so it no longer described them as delivered hot and ready to serve.

The outcome. The historic position was settled at £165,000. As HMRC had already raised its assessment, the minimum penalty would normally have been 15%. HMRC would not accept that the caterer had a reasonable excuse, but it agreed a special reduction under paragraph 11 of Schedule 24 Finance Act 2007 once we gave an assurance that the caterer’s VAT returns would be reviewed before submission from then on. No penalty was charged. Going forward, around 40% of the range was moved to chilled meals that the customer stores, reheats and serves itself, with no service element and no supply for immediate consumption, which, with the supply contracts rewritten as sales of food rather than a catering service, makes them zero-rated food and saves £46,000 a year.

Furnished holiday lettings are gone, but relief on a business that stopped before April 2025 can last until 2028

The issue. A client owned three holiday cottages that had qualified as furnished holiday lettings for years. The regime was abolished from April 2025 and the client assumed all the tax advantages had gone with it, including any prospect of Business Asset Disposal Relief on a sale. He was preparing to sell at a 24% capital gains tax rate on a gain of around £620,000.

What we did. The regime has gone, but the transitional rules have not. Where the furnished holiday letting business actually ceased before 6 April 2025, Business Asset Disposal Relief remains available on a disposal within three years of cessation, so 5 April 2028 is the latest date for anyone, and earlier for a business that stopped before 2024/25. The point HMRC has been explicit about, and that most commentary misses, is that the repeal itself is not a cessation. This only helps clients whose business genuinely stopped. We checked the conditions had been met in the final qualifying year, established and evidenced the cessation date, checked the anti-forestalling rule for contracts entered into on or after 6 March 2024, and modelled the disposal against the lifetime limit. Separately, we dealt with three things the client had not been told. The capital allowances pool closes on cessation, so a balancing adjustment was due for the final period of the business. The unused losses carry across into the client’s ordinary UK property business, because the holiday let business was still running in 2024/25 and he kept other lettings in 2025/26, so they can be set against future rental profits. And the VAT position has not changed, because holiday accommodation was always standard rated and still is.

The outcome. Relief claimed at 18% rather than 24% on the £620,000 gain, a saving of £37,200, plus £38,000 of brought-forward losses preserved against the remaining portfolio. The sale was reported on a 60-day capital gains tax return.

Restaurant chain: a tronc scheme on tips and a £260,000 service charge VAT reclaim

The issue. A restaurant chain collected tips and a discretionary service charge from customers and distributed them to staff through its main payroll. Because the payments ran through the normal payroll, they were being treated as ordinary earnings and subjected to National Insurance, an avoidable cost for both the business and its people. Separately, the previous accountant had treated the discretionary service charge as VATable income, charging VAT on amounts that should never have been within the scope of VAT at all.

What we did. We tackled both problems. First, we advised the client to set up a separate tronc PAYE scheme, run independently by a troncmaster rather than by the employer. When tips and discretionary service charges are allocated through a properly constituted tronc, with the troncmaster, not the company, deciding how they are shared, the payments fall outside the National Insurance net. Second, we corrected the VAT position: a discretionary service charge, provided certain conditions are met, is not consideration for a supply and is therefore outside the scope of VAT. We reviewed the arrangements, established that the charge had been genuinely discretionary, and submitted a claim to recover the overpaid VAT going back the full four years permitted, prepared with evidence on who actually bore the cost, because HMRC can meet a claim of this size with the unjust enrichment defence in section 80(3) VATA 1994 where the VAT was passed on to customers.

The tipping law. The Employment (Allocation of Tips) Act 2023, in force since 1 October 2024, requires employers to pass on all tips they control or influence without deductions other than tax, to share them fairly in line with the statutory Code of Practice, and to have a written tipping policy. The Employment Rights Act 2025 will also require employers to consult staff on that policy and review it at least every three years; the change was due in October 2026 and is now expected later this year. The tronc survives all of this, but it now has to satisfy employment law as well as the National Insurance rules, and the two are easiest to document together.

The outcome. The new tronc arrangement removed the National Insurance charge on tips and service charges, generating a saving in employer’s National Insurance alone of around £42,000 to £45,000 a year for the company, in addition to the employees’ National Insurance saved for all the staff. The VAT correction recovered approximately £260,000 of overpaid VAT across the four years under review.

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Every case above started the same way: a business owner asking us to look again at something another adviser had treated as settled. We are Chartered Certified Accountants and Chartered Tax Advisers, our team includes professionals who have worked inside HMRC, and our partners have built their own businesses from nothing to over £1m in turnover. In most cases the tax we save exceeds the fee we charge.

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