UK Hotels at 20% VAT: Why Margins Are Thinner—and What To Do About It
Recent reporting has captured operators’ frustration: rising taxes, higher energy and wage bills, and tight labour are crushing margins. “A busy pub doesn’t mean a profitable pub,” as one landlord put it—an observation that increasingly fits hotels, too. The question for our sector isn’t whether pressures are real; it’s how we respond—commercially and politically—before another winter tests the P&L.
What’s changed for UK hotels in 2025
Employer National Insurance rose to 15% on 6 April 2025, and the secondary threshold fell to £5,000—raising payroll costs across rooms and F&B. HM Treasury’s own papers and HMRC guidance confirm the change. GOV.UK+1
VAT reliefs for hospitality ended back in March 2022. Accommodation and most hotel F&B have been back at the 20% standard rate since 1 April 2022. GOV.UK
Trading is softer: CoStar/Skift report UK hotel RevPAR/GOPPAR pressure in H1 2025; Knight Frank’s latest dashboard also flags a Q2 step-up in payroll costs post-NIC rise. SkiftCoStarKnight Frank UK
London reliance on high-spend visitors is colliding with policy headwinds (notably the end of VAT-free shopping), with West End spend estimated down hundreds of millions in H1—knock-on effects that hotels feel. The Times
How the UK compares with Europe
Many European markets tax hotel stays at reduced rates: Spain applies 10% to hotel accommodation; France widely applies 10% to hotels/restaurants; Germany applies a 7% reduced rate to lodging. The UK taxes hotel accommodation at 20%. Eurofiscalis Internationalmobilexpense.com
Policy momentum is also tilting toward professionally run hotels over unregulated alternatives. Spain, for example, has proposed applying 21% VAT to short-term tourist rentals (vs 10% for hotels), explicitly reframing the playing field. Reuters
Signals from the market
Operators are doubling down on revenue tech and mix management to fight cost inflation—especially in the economy and select-service segments. CoStar
Forecasts for 2025 have been adjusted downward as costs outpace topline growth; even where ADR is holding steady, profit flow-through is thinner. CoStar
A constructive policy ask
Trial a time-limited VAT cut for hospitality (e.g., to 12.5% for 24 months) tied to measurable outcomes (jobs, apprenticeships, capex), then assess net fiscal impact. UKHospitality’s case and APPG recommendations point in this direction. UKHospitality+1
Ease the April 2025 NIC step-up for smaller employers (or increase Employment Allowance further) to reduce payroll drag in labour-intensive departments. GOV.UK
What hotels can do now (playbook we’re using with clients)
Price integrity
If you use an “inclusive/amenity” fee, list inclusions clearly and show guest value; otherwise, keep rate plans clean and transparent. (Consumer pushback on opaque pricing is real.)
Labour & rota discipline
Re-baseline rota math with NIC at 15% and the lower threshold, not last year’s assumptions; concentrate hours around periods of real demand (events, shoulder peaks). GOV.UK
F&B margin engineering
Tilt menus to resilient GM% and prep efficiency; monitor supplier-led COGS weekly; promote on-property experiences to keep spend in-house when city spend softens. CoStar
Channel mix
Trim your highest-cost channels; trade guests into direct via value-adds (late checkout, parking, bar credit) instead of blunt discounting.
GEO / GAI optimised website
Enhance visibility and direct booking potential by aligning with evolving search behaviors and increasing reliance on utilizing AI tools to find accommodations.
Corporate & HNW demand
If you’re London-centric, partner tightly with luxury retail/attractions to offset the loss of tax-free shopping halo effects; build packages that restore perceived value. The Times
Advocacy
Localise the impact for your MP: jobs supported, supplier spend, apprenticeship places at risk—then plug into UKHospitality’s #TaxedOut brief so messages are consistent. UKHospitality
Bottom line
Hotels aren’t asking for special treatment—just a level playing field that recognises our labour intensity and local economic multiplier. A targeted VAT/NIC reset, paired with smarter on-property execution, would protect jobs and keep high streets alive through the next down-cycle. The data—and the daily P&L—say the time to act is now. SkiftKnight Frank UK
Further reading
GOV.UK: Temporary hospitality VAT relief ended 31 March 2022; standard rate applies from 1 April 2022. GOV.UK
HM Treasury/HMRC: Employer NICs increased to 15% from 6 April 2025; secondary threshold reduced. GOV.UK
CoStar/Skift: UK hotels struggled through H1 2025; profitability compression noted. Skift
Knight Frank, UK Hotel Dashboard Q2 2025: payroll pressures post-April reflected in departmental costs. Knight Frank UK
UKHospitality, “TaxedOut”: case for a VAT reduction for hospitality. UKHospitality
Comparative VAT (hotels): EU reduced rates overview; Germany 7% lodging; France/Spain 10% tier. Eurofiscalis Internationalmobilexpense.com
Reuters: Spain proposes 21% VAT on short-term tourist rentals (policy tilt favouring hotels). Reuters
The Times: West End spend hit by the end of VAT-free shopping—broader tourism ecosystem impact. The Times
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