Insights
VAT
VAT on hotel guest cancellations
If hotel rooms are cancelled at short notice or not used, guests often still have to pay for the room or pay cancellation fees. Tourism operators must observe the VAT consequences of such charges.
A supplier's services are subject to VAT only when they are provided for consideration, i.e. when the service is exchanged for a payment. Payments made by the customer because the supplier must compensate for damage (damages) do not constitute a service exchange and are therefore not subject to VAT.
VAT liability of “no‑show payments”
If guests book a hotel room, do not take up the booked room – without timely cancellation – (so‑called “no‑shows”), the cost of the room is usually still charged in full. Whether such no‑shows are to be invoiced with or without VAT depends on whether a service exchange has already taken place or whether the payments rather constitute damages.
It must be noted that, according to the case law of the European Court of Justice (EuGH), a VAT‑liable service exchange already exists when the entrepreneur or hotelier was ready to provide the service and was prevented from doing so only by circumstances attributable to the purchaser or guest. If, from the entrepreneur’s or hotelier’s perspective, everything required to provide the service has been done, the service is considered for VAT purposes to have been performed as soon as the customer can actually make use of the benefit. In such a case the payment is therefore subject to VAT.
No VAT on pure cancellation fees
Distinguished from “no‑show fees” are pure cancellation fees. These are usually invoiced when the customer reserves a room but cancels it only after the free‑cancellation period has expired. Unlike no‑shows, the customer here cancels before the service is taken up. According to the tax authorities, pure cancellation fees are generally not subject to VAT due to the lack of a service exchange, provided the hotel booking is cancelled before the point of service readiness. This applies even if the costs of preparatory actions are covered by the cancellation fees. If a deposit for the hotel booking has already been paid and this deposit is forfeited as a cancellation fee, the invoice must be corrected by the hotelier. If no invoice correction is made, the VAT accounted for in the deposit becomes due by virtue of the invoice issuance.
Income‑tax treatment
Both “no‑show fees” and cancellation fees (in the sense of damages) are subject to income tax and corporation tax.
VAT liability of “no‑show payments”
If guests book a hotel room, do not take up the booked room – without timely cancellation – (so‑called “no‑shows”), the cost of the room is usually still charged in full. Whether such no‑shows are to be invoiced with or without VAT depends on whether a service exchange has already taken place or whether the payments rather constitute damages.
It must be noted that, according to the case law of the European Court of Justice (EuGH), a VAT‑liable service exchange already exists when the entrepreneur or hotelier was ready to provide the service and was prevented from doing so only by circumstances attributable to the purchaser or guest. If, from the entrepreneur’s or hotelier’s perspective, everything required to provide the service has been done, the service is considered for VAT purposes to have been performed as soon as the customer can actually make use of the benefit. In such a case the payment is therefore subject to VAT.
No VAT on pure cancellation fees
Distinguished from “no‑show fees” are pure cancellation fees. These are usually invoiced when the customer reserves a room but cancels it only after the free‑cancellation period has expired. Unlike no‑shows, the customer here cancels before the service is taken up. According to the tax authorities, pure cancellation fees are generally not subject to VAT due to the lack of a service exchange, provided the hotel booking is cancelled before the point of service readiness. This applies even if the costs of preparatory actions are covered by the cancellation fees. If a deposit for the hotel booking has already been paid and this deposit is forfeited as a cancellation fee, the invoice must be corrected by the hotelier. If no invoice correction is made, the VAT accounted for in the deposit becomes due by virtue of the invoice issuance.
Income‑tax treatment
Both “no‑show fees” and cancellation fees (in the sense of damages) are subject to income tax and corporation tax.