Hospitality and Leisure Tax Case Studies
Hospitality runs on tight margins, so tax mistakes hurt more here than almost anywhere else. These six real cases cover gift cards, cancellation fees, fit out capital allowances, the hot food rules, holiday lets and tips, and what fixing each one was worth.
The sector has its own VAT and employment tax rules, and they change often. These cases show what happens when someone who knows them looks at a hospitality business properly.
Gift card 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 are then disregarded entirely, 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 remainder deferred from sale to redemption, worth £14,000 a year in working capital.
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 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. But the revised policy on early termination and cancellation fees only requires businesses to have adopted the new treatment from 1 April 2022, and in practice HMRC does not pursue earlier periods where the previously published guidance had been followed. That took a full 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 they were brought into charge from 1 March 2019, so only the cancellation fee element benefited from the later date. 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, which secured the maximum reduction available on the quality of the disclosure. 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, the penalty was reduced to the minimum for a careless inaccuracy, and the venue’s booking terms and accounting treatment now line up.
Pub and restaurant fit-out: £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, prints and light fittings qualified, following the House of Lords in Scottish and Newcastle Breweries, 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 JD Wetherspoon 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, 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 were also careful with the pre construction professional fees, because the Supreme Court held in Ørsted West of Duddon Sands, the Gunfleet Sands case, in April 2026 that surveys and studies of that kind are not expenditure on the provision of plant.
The outcome. £310,000 of plant and integral features identified from a £1.4m spend, worth £77,500 in corporation tax at 25%. Most of it was covered by the annual investment allowance in the year of spend.
How the words “piping hot” on a website created a standard rating
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 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 every limb was satisfied, and the First-tier Tribunal decision in Slice of Pie in January 2026 shows how readily they are met. 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. Going forward we mapped which parts of the range could genuinely be supplied cold or ambient and repriced them, and rewrote the marketing so it no longer created a liability that the product did not have to carry.
The outcome. The historic position was settled at £165,000, with the penalty charged at the minimum for a careless inaccuracy after full disclosure and cooperation, and around 40% of the range was moved to a genuinely zero rated cold delivery model, saving £46,000 a year going forward.
Furnished holiday lettings are gone, but the relief window is open until April 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 the last date is early April 2028. 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 existing capital allowances pool continues to be written down even though new expenditure now falls under the ordinary property rules, the accumulated losses are not lost and can be set against any UK property business profits, and the VAT position has not changed at all, 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.
Restaurant chain: a tronc scheme on tips and a £260,000 VAT reclaim
The issue. This 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.
The outcome. The new tronc arrangement removed the National Insurance charge on tips and service charges, generating an overall saving in the region of £42,000 to £45,000 a year, a recurring benefit for as long as the scheme is in place. The VAT correction recovered approximately £260,000 of overpaid VAT across the four years under review. It’s a clear example of why hospitality businesses need advisers who understand the sector’s specific tax rules, and how the right technical knowledge, properly applied, can turn two inherited mistakes into substantial, lasting savings.
Could we do the same for you?
Every case above started the same way: a business owner asking us to look again at something another adviser had treated as settled. Merit is dual qualified. We are Chartered Accountants and Chartered Tax Advisers, our founder worked inside HMRC, and our partners have built businesses of their own. In most cases the tax we save exceeds the fee we charge.
Related services: Hospitality and leisure accountants · VAT returns · Payroll and P11D processing.