VAT in the hospitality sector – where will costs increase?

The UAE and Saudi Arabia are leading the way in value added tax (VAT) implementation, having announced their intention to embrace this new tax regime on January 1. VAT is now more of a reality than ever with less than two months to go and registration open for all businesses.

Hospitality and tourism are two of the most promising sectors of the UAE economy, contributing a significant amount to the country’s GDP. To examine the effect of VAT in the hospitality and tourism industry, it is important to consider individuals and businesses from hotels to travel and tour operators – looking at where costs will increase and what special considerations have to be taken. First, let us look at the impact on hospitality businesses.

Firms will have to make notable changes in their supply chain and marketing strategies as they look to optimise their systems and processes in preparation for documentation and other requirements of VAT.

Pricing strategies will have to be re-evaluated, suppliers will have to be looked at, and processes need to be put in place to recover input tax credits and also be ready for VAT implementation.

Restaurants, cafes and hotels have multiple sources of revenue ranging from food and beverage, ballrooms and banquet halls to rooms, tours, salons and spas. Each of these revenue streams is treated differently for tax, and must be consolidated to determine the firm’s VAT liability. Considering this, information technology systems and processes are the most important element of VAT preparation when it comes to complex and diverse revenue streams.

Tours and travel are another area where special considerations need to be made for VAT. For air travel there are a number of charges such as no-show, excess baggage, on-board food and beverage, cancellation charges, date-change charges and so on – each of which will have different tax treatments.

Airlines will also be required to claim input VAT on various charges recovered by the airport authorities, such as ground landing charges, parking charges, service fees and other charges incurred such as overflight charges, overhaul and maintenance charges. To compute VAT, businesses need to determine the value of supply that can be subject to interpretation when discounts, airline fees and miles are taken into account. All of this poses a number of new considerations for airlines.

Secondly, let us look at the impact on individual consumers – you and I. From January 1, meals in restaurants and hotels will be subject to a 5 per cent VAT.

This will lead to an increase in cost for UAE residents, however, the impact is expected to be marginal due to the technical nature of VAT and how it operates in terms of credits and basic exclusions.

For VAT-registered businesses in the UAE, input credit can be claimed on meals or travel-related costs incurred for business purposes, which should minimise the effect of any VAT-related price increase.

For example, if an employee takes his client out to lunch and expenses the cost to his employer, the employer (if they are a VAT-registered business in the UAE) can claim the VAT cost of that meal from the government.

Tourism is pivotal to the UAE’s economy, as the country has built itself up over the years to be a popular destination for weddings, sporting events and shopping festivals. With this in mind, it is expected the government will implement a VAT-refund scheme for tourists.

VAT is not just an accounting change, but an overall business change as it affects every business function from marketing to finance. Companies within the hospitality segment should keep in mind flexibility and adaptability combined with a vision of consumer needs, and make informed business decisions ahead of the implementation date.

Businesses should consider approaching tax authorities to obtain necessary clarification wherever necessary. A VAT strategy that takes into account all of the factors mentioned and that is implemented well in advance can help businesses not only be VAT ready and compliant on day one, but also leverage optimisation strategies that could help them gain a competitive edge in the market.