Not many people have heard of the 4% VAT rate. Everyone is familiar with the standard 20% VAT rate, the reduced 5% VAT and zero rating. What is far less well known is that there is a way in which hotel and similar accommodation can end up bearing an effective rate of about 4% VAT on long stays. This is not a separate statutory rate, and you will never see “4%” written into the legislation. Instead, it arises from a valuation rule that applies to long-term occupation of hotel, inn, boarding house or similar establishment, usually referred to as the 28-day rule.
The 28-day rule affects the VAT position of hotels, guest houses, serviced apartments, student accommodation providers and similar operators where individuals stay for more than four weeks. It changes the value on which VAT is charged after the first 28 days of an individual’s stay, so that only a portion of the total charge is treated as taxable. Because that portion can be as low as 20% of the total, and the standard VAT rate is 20%, the combined effect is an effective VAT burden of about 4 % of the total price for long stays.
What follows is a detailed yet accessible explanation of the 28-day rule for VAT on long-term hotel accommodation. It is aimed at both advisers and businesses in the hospitality and accommodation sector.
The Legislative Foundation
To understand how the effective 4% VAT position arises, we need to start with the legislation. The 28-day rule is found in Paragraph 9 of Schedule 6 to the Value Added Tax Act 1994 (“VATA 1994”). Paragraph 9 applies where there is a supply of services consisting of the provision of accommodation that falls within paragraph (d) of Item 1 of Group 1 in Schedule 9. In broad terms, that is accommodation in a hotel, inn, boarding house or similar establishment.
In its simplest form, the rule says that where an individual occupies such accommodation for more than four weeks, the value of the supply for the period after the first 28 days is reduced so that only the portion attributable to facilities other than the right to occupy the accommodation remains taxable, and that portion must not be less than 20% of the total.
It is worth emphasising what this does and does not do:
- It does not change the VAT rate, which remains the standard rate (or any applicable reduced rate in force).
- It does not turn the supply into an “exempt” supply.
However, it changes the value on which VAT is calculated after 28 days by carving out the accommodation element from the taxable base.
The result is that for the first 28 days of any qualifying stay, VAT is charged on the full charge for the room. From day 29 onwards, only at least 20% of the charge is treated as taxable. So, if we apply 20% VAT on the 20% of room rent, you get an effective VAT of 4% is arrived at. However, the balance 80% is not an exempt supply so there is no restriction on claiming back the input VAT.
The Conditions: Qualifying Accommodation
Qualifying Accommodation: Defining Similar Establishment
The expression “similar establishment” has a much wider reach than many landlords realise. The same legislation extends the meaning of “similar establishment” to include premises in which furnished sleeping accommodation is provided and which are used, or held out as suitable for use, by visitors or travellers. Whether or not the premises provides for the board or facilities for the preparation of food is not particularly important.
This expanded definition brings into scope many business models that might, informally, be described as “residential” but, in VAT terms, look more like hotel-type operations. Examples include:
- A block of serviced apartments marketed to visiting business people and tourists, with regular cleaning, linen provision and reception services.
- Student accommodation where the provider offers regular services and markets the accommodation as suitable for temporary stays by visitors outside term time.
If a landlord is providing furnished accommodation, offering services such as cleaning and reception, and promoting the premises as suitable for visitors or travellers, HMRC are likely to argue that this is a similar establishment. In that case, the supplies are taxable at the standard rate and form part of the hotel-type accommodation category explained above. The 28-day rule can then come into play where individual stays exceed four weeks.
This can be a double-edged sword. On the one hand, it means that some accommodation that has been treated as exempt is actually taxable. On the other hand, it means that once those supplies are correctly taxed as hotel-type accommodation, the provider can access the 28-day valuation relief for long stays and potentially reduce the VAT burden significantly for long term occupation.
The Recipient of Supply: Bookings Eligible for The Rule
The primary condition for the rules to apply is that provision must be made “to an individual” for a period exceeding four weeks. This raises practical questions in situations where a third party such as an employer, local authority or housing association is paying for the accommodation.
Take the example of a company booking a hotel room for an employee for six weeks. The legal contract is between the hotel and the company, not the individual. A strict reading might suggest that the 28-day rule is not engaged because the recipient is a corporate body, not an individual.
HMRC recognises that such a strict approach would not reflect commercial reality. In Notice 709/3, HMRC accepts that the 28-day rule can apply where the supply is made to someone other than the individual, provided that the same individual actually occupies the room for more than 28 days. In effect, HMRC looks through the contract to the actual pattern of occupation.
There is, however, a clear limit to this “look through” principle. If a company books a room for six weeks but rotates the occupant every week, so that person A stays in week 1, person B in week 2, and so on, no single individual occupies the accommodation for more than four weeks. The 28-day clock effectively resets with each new occupant. In that scenario, the conditions for the 28-day rule are never met, and VAT remains chargeable on the full value for every night.
The Recipient of Supply: Continuity of Stay and Breaks
Similar issues arise in determining when an individual’s period of occupation is treated as continuous for the purposes of the 28-day rule, particularly where there are short breaks in residence.
In Notice 709/3, HMRC adopts what appears to be a relatively generous position. The guidance states that a long-term resident who leaves for an occasional weekend or holiday is not treated as ending their stay. Similarly, students who leave during vacations but return to the same accommodation are treated as having a continuous period of occupation. It does not matter whether the guest returns to the same room or not. On that basis, a guest could leave on Friday, return on Monday, and still be regarded as continuously resident for VAT purposes, so that the reduced valuation continues to apply after the first 28 days.
However, in a 2014 technical note, HMRC described this treatment as a concession that did not have a clear legal basis under EU law. They indicated that from 1 April 2015 they would treat any break in the stay as ending the period of occupation unless the guest retained and paid for the room during their absence. On that stricter view, checking out and not paying to hold the room breaks the continuity, so the 28-day clock restarts when the guest returns.
The complication is that when Notice 709/3 was updated in 2019 and again in 2020, the generous wording around breaks was not removed. The public notice still reflects the older, more lenient treatment, while the technical note sets out a stricter position.
Under general principles of public law and legitimate expectation, taxpayers are usually entitled to rely on clear statements in HMRC public notices, unless and until those statements are corrected. In practice, that means there is a credible argument that businesses can rely on the wording of Notice 709/3 in relation to occasional weekends and short holidays, although a strict legal purist might prefer the more cautious approach in the technical note.
One way of avoiding disputes over continuity is the use of a retainer. If a guest is absent for a period but pays a retaining fee to keep the room for their sole use, the stay can be treated as continuous. There is a specific valuation quirk here. Where the retaining fee is no more than the non-taxable element of the normal charge (often 80% where the 20% floor is used), it can be treated as fully non-taxable. If it exceeds that, the excess must be apportioned, and at least 20% of the total fee treated as taxable facilities.
Reduced Rated in Practice
Once the conditions are met, the mechanics of the 28-day rule are straightforward in principle, even if they are sometimes awkward to implement in systems.
For the first 28 days of an individual’s stay in hotel-type accommodation, the usual VAT rules apply and VAT is charged on the full value of the supply at the applicable rate. From the twenty-ninth day onwards, the supplier must split the charge between:
- The value of facilities other than the right to occupy the accommodation, which remains taxable, and
- The value of the accommodation itself, which becomes non-taxable for valuation purposes.
The legislation insists that the value attributed to the facilities must be not less than 20% of the total value. That figure is a statutory minimum, not a fixed rate. If the actual cost and value of the services is higher, then the higher percentage should be used. If the services are minimal, the supplier must still treat at least 20% as taxable.
For a simple room-only arrangement where a guest pays £100 per night, the standard approach is to treat at least £20 per night as the taxable portion from day 29. The remaining £80 is treated as non-taxable accommodation. If the hotel provides more extensive services, for example full board catering, reception, gym access and concierge, the true value of those facilities might be £40 or more, in which case VAT should be charged on that higher amount.
In practice, many hoteliers and serviced apartment operators adopt the 20% minimum as a safe and simple percentage, and HMRC officers often accept that as a default valuation. However, strictly speaking, the apportionment should reflect the economic value of the services where that differs significantly from the minimum.
Elaboration on the Effective 4% VAT
As discussed above, the idea of “4% VAT” on long-term hotel accommodation comes from the combined effect of the 20% minimum facilities value and the standard 20% VAT rate.
If, after day 28, exactly 20% of the total nightly charge is treated as taxable, and the VAT rate is 20%, then the VAT due is 20% of 20% of the total price. That gives an effective VAT burden equal to 4% of the total room charge. On a £100 per night rate, VAT would be £4 instead of £20.
Where prices are quoted VAT-inclusive, the headline customer price may not change at all once the stay exceeds 28 days. The hotel might continue to charge £120 per night inclusive. However, from night 29, the internal VAT calculation changes. Only the facilities portion, say £20 net, bears VAT, which will be £4. The remainder is treated as non-taxable and does not carry VAT. The business therefore remits less VAT to HMRC on long stays, while often charging the customer the same gross rate.
This is why the 28-day rule is sometimes described as a way for hotels and serviced apartment operators to enjoy an effective 4% VAT rate on long stays. Although that is a convenient shorthand, the underlying legal mechanism is a valuation reduction, not the creation of a new VAT rate.
Important Case Laws on the 28-Day Rule
Several decisions give useful guidance on how far the 28-day rule extends and when it is engaged. We look at two of these cases below:CYL operated hostels for homeless young people. After reviewing other YMCA facilities, HMRC took the view that these hostels were not comparable to hotels and therefore could not apply the reduced valuation for residents staying more than 28 days. HMRC argued that the accommodation did not fall within Item 1(d), so the 28-day rule was not available. Their position was that the supplies were taxable in their own right.
The Tribunal rejected HMRC’s analysis of the nature of the supply. It adopted a functional approach, looking not only at the formal legal characterisation of the arrangement but also at the economic reality. The Tribunal found that CYL provided residents with the use of a bedroom for their own exclusive enjoyment for a defined period and in return for payment, notwithstanding the provisions of Clause 7. HMRC had also argued that the supply involved various separate components, such as communal facilities, which should be treated as standard rated. The Tribunal disagreed, concluding that around 95% of the daily charge related to the bedroom itself and that this element was the predominant part of the supply.
On that basis, the Tribunal held that the supply fell within Item 1(d) and that the 28-day rule did apply.
Interaction of the 28-Day Rule and VAT Registration
Perhaps the most sensitive technical issue, particularly for smaller operators, is how the 28-day rule interacts with the VAT registration threshold. This is an area where HMRC guidance and the wording of the statute appear to point in different directions.
The registration threshold is based on the value of taxable supplies made in the UK over a rolling 12-month period. Section 8 of Notice 709/3 states that where the 28-day rule applies, the business must still count the full VAT-exclusive amount of the charges towards its taxable turnover for registration purposes. In effect, HMRC’s guidance says that the valuation reduction should be ignored when assessing whether the threshold (currently £90,000) has been exceeded.
The legislation, however, takes a different approach. Paragraph 9 of Schedule 6 is not described as a mere concession. It tells us what the value of the supply is for VAT purposes once the conditions are met. If, from day 29, only 20% of a £100 nightly charge is treated as taxable, the legal value of the taxable supply is £20, not £100.
Where a small boarding house or serviced apartment operator has gross receipts of, say, £100,000 from long-term guests in a year, but applying the 28-day rule reduces the taxable value of those supplies to £80,000, there is a strong argument that the business has not made taxable supplies exceeding the registration threshold. On that reading, the business would not be required to register for VAT, even though HMRC’s notice suggests otherwise.
This is not a purely academic point. For some small or owner-managed “hotel-like” businesses, especially those dealing heavily in long stays, the difference between counting gross receipts or reduced taxable value can decide whether they fall inside or outside compulsory registration.
Conclusion
The 28-day rule can offer valuable VAT savings for hotels, serviced apartment operators and other providers of short-term accommodation, but it is only effective where the underlying conditions are properly understood and applied. Determining whether a business is operating a hotel-type establishment, identifying the individual who is treated as the recipient of the supply and assessing whether a stay is continuous all require careful analysis. The case law shows that tribunals focus on the economic reality, and businesses should ensure their arrangements, contracts and operational practices support the VAT position they wish to adopt.
Where the rule applies, the reduction in taxable value after 28 days can bring the effective VAT burden down to around 4%. This can make long-term stays more commercially attractive and offer a competitive advantage in markets such as serviced accommodation, student housing and temporary workforce lodging. However, the rule also creates practical challenges, including the need to track individual occupation patterns and operate accurate apportionment methods. In addition, the interaction with VAT registration merits close attention, as the legislation and HMRC guidance diverge on how turnover should be measured. Providers should therefore keep their systems, documentation and policies under review to ensure the relief is applied correctly and sustainably.
- VAT for Overseas Companies dealing in the UK Land - 26 February 2026
- Autumn Budget 2025 – A Complete Guide - 28 November 2025
- The 28-Day Rule: The Reduced Rated VAT on Long Term Stays - 28 November 2025
