The letting of land is exempt from VAT unless it falls into one of the  many exemptions from the exemption for VAT. One of those exemptions to  the exemption is where accommodation is provided in hotels, inns,  boarding houses and similar establishments, including rooms provided  for the purpose of catering, i.e. an eating and drinking occasion.

If you hire a room in a hotel for a group function including a  meal, and the hotel supplies the catering, the whole fee is  subject to standard rate VAT. If the catering is supplied by an  outside caterer, the Taxman used to take the view that the room hire  would be exempt from VAT, whilst the catering cost would carry  standard rate VAT (if the caterer was VAT registered). However, the  Taxman changed his mind on this point in October 2011, and updated the  VAT Notice 709/3: Hotels and holiday accommodation.

Unfortunately he didn’t tell anyone he had released a new version of  that leaflet so few businesses were aware of the change in practice,  and confusion reigned. Now the Taxman has issued some more guidance as  HMRC Brief number 02/13.

That guidance says where a room in a hotel is supplied for the  purposes of catering, whether or not the catering is supplied by the  same establishment, the room hire is subject to VAT at the standard  rate. If you run a hotel, pub or similar place that hires out rooms,  and have got this wrong in the past, the Taxman has said he will not  pursue you for the VAT which should have been charged. However, you  need to get the VAT treatment right from now on.