Why UK hotel rates are going to increase at the end of this month

The cost of a U.K. vacation is set to soar next month as the VAT rate for the hospitality industry jumps just in time for Easter.

Travelers are already feeling the pinch of rising travel bills as the tourism industry scrabbles to recoup its losses after a biting pandemic, and fuel prices also soar.

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And on April 1 — in news that'll come as no joke to anyone planning a holiday this spring — the government is due to raise the VAT rate on most goods and services in the hospitality sector from 12.5% back to its pre-pandemic level of 20%.

Because hotels and resorts tend to pass VAT on to guests, it means the total price of a British hotel room will also increase as VAT rises by 7.5%.

The hospitality industry had begged British chancellor Rishi Sunak to renege on his pledge to raise the VAT rate. But today (March 23), their pleas fell flat after Sunak ignored calls to freeze hospitality VAT at 12.5% in his Spring Statement.

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“This is a real setback for thousands of U.K. hospitality businesses still suffering the devastating effects of [COVID-19], and facing a tidal wave of rising costs," said Kate Nicholls, CEO of UKHospitality, which advocates for the U.K.'s hospitality sector. "For many businesses, the removal of the lifeline of a lower rate of VAT might prove fatal."

She said that thousands of jobs could be lost as a result of the VAT hike, adding: "Already hard-pressed consumers in the midst of a cost-of-living crisis will see price rises ... further fuelling inflation."

The hike is seen as a kick in the teeth to British hotels Britain-bound travelers, as the U.K. already has one of the highest rates of tax for hospitality in Europe. In France and Spain, for example, the VAT rate is set at only 10%. It's just 7% in Germany and 6% in Belgium.

Why the change?

Originally set at 20% for the hospitality industry, the government reduced the VAT rate to 5% at the height of the pandemic to ease pressure on hotels, bars, restaurants and other struggling venues.

But as the vaccine rollout gained momentum and economies reopened, the government increased the rate to 12.5% in October of 2021, promising to return it to its old level on March 31.

What does this mean for guests?

Essentially, it means guests staying in an average £140 a night room in London (about $185) can expect to see an extra £28 (approximately $37) a night added to their bill — that's £10.50, or about $14 more than they would currently pay.

This might not seem like an extortionate amount, but if you’re booking more expensive rooms, that cost will add up.

Imagine you're staying in a £1,500 per night luxury suite in one of London's top hotels this Friday (about $1,981). Broken down, that's £1,333 (about $1,761) for the room and £167 ($221) with the 12.5% tax.

After April 1, however — unless the hotel recalibrates its before-VAT (ex-VAT) base price in line with the change — that same room will cost £1,600 ($2,113) ... an extra £100, or $132 a night.

What do the hotel chains say?

TPG has reached out to four of the U.K.’s largest luxury hotel chains (Hyatt, Marriott, Hilton Hotels and Radisson Hotels) — to ask what affect the rise will have on guests.

“Nothing will change from Hyatt’s point of view; in line with the government’s directive to reinstate the standard tax rate, a decision that will affect all other businesses within the U.K. hospitality sector, Hyatt will be adjusting the VAT rate from 12.5% back to 20%," a spokesperson for Hyatt told TPG.

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When pushed for what precise impact this will have on guests, the spokesperson added: “The cost of the room to the consumer will be impacted by the increase of the VAT, however, the net cost of Hyatt’s room rates is not changing.”

Translation: The total price you'll pay for a U.K. hotel stay is going up.

A spokesperson for Marriott did not directly answer the question, implying instead that the hike will not only kick the sector when it's already down but could scare off guests by driving up prices.

"In the current climate of inflation, rising energy and labor costs and supply chain challenges, retaining the 12.5% VAT level is vital for the U.K. hospitality sector," the spokesperson said. The spokesperson described a return to 20% VAT as "an additional pressure on a sector that is already working hard to recover from the significant impact of [COVID-19] restrictions on travel and hospitality over the last two years."

Radisson did not respond to our request for comment, while Hilton declined to discuss the issue.

Cheaper rooms, or higher hotel margins?

"This measure is expected to boost cash flow and viability of businesses in the hotel, hospitality and tourism sectors," said the government in its proposal for the scheme in July of 2020. "Where businesses opt to pass some or all of the saving on to customers this may result in increased spending in these sectors."

In other words, the idea was not necessarily to reduce prices and boost demand, though in some cases that may have been what happened. Rather, it gave hotels an (arguably quite reasonable) opportunity to increase their net prices and grow their margins.

Crucially, in the U.K., VAT is always included in the advertised price. So, if a VAT liability reduces, there is no onus on a hotel or restaurant to refund customers with the difference.

Therefore, it all comes down to pricing strategy. With no obligation to share their VAT savings with guests, hotels were essentially left with a tactical choice. Either:

• Reduce their advertised pricing to attract more custom, or;
• Increase their ex-VAT base rate to charge guests the same as before, and take more in profit.

Now, given how hard the hospitality industry was hit by the pandemic, you might think it perfectly reasonable for a hotel to up its ex-VAT base rate to cover its losses.

And, indeed, if you use points, it works out better for you as points are calculated on ex-VAT pricing.

How does this affect my points?

Loyalty points are calculated from the ex-VAT price you pay, not the taxes and fees. So, if you're a member of a hotel loyalty program, an increase in VAT will only make a difference to your points if the hotel reduces its ex-VAT base rate to share the saving with its guests.

If, as Hyatt confirmed to us, a hotel's base rate remains the same, the points you earn will not change but taxes will increase. If however, a hotel lowers its base rate to keep the total price the same as before the VAT increase you could earn fewer points.