ICAS raises concerns with Scottish government about VAT guidance on new Visitor Levy

We look at the proposals in the guidance for the new Scottish Visitor Levy and the potential VAT implications – which we are querying with Scottish government and HMRC.

Background

We’ve been working with Scottish government intermittently over the last few years to offer policymaking views on how the Scottish Visitor Levy (SVL) or “tourist tax” might be formulated.

The SVL is a local tax which has been legislated for by the Scottish Parliament. It is within the competence of the Scottish Parliament to raise local taxes in Scotland without needing to obtain permission from Westminster. Each local authority in Scotland can choose whether they will raise the tax on tourists staying in hotel and other types of accommodation within the local authority’s area. Edinburgh Council have already declared they will implement the SVL with effect from Summer 2026.

National taxes are different – if the Scottish government wishes to create devolved legislative provisions for taxes that apply UK-wide, they must agree for the existing UK tax to be devolved to Scotland – an example being Stamp Duty Land Tax, a UK Tax which is now devolved to Scotland and legislated for as ‘Land and Buildings Transaction Tax’. 

Scottish Visitor Levy

The SVL can be charged at a rate of the local authority’s choosing per night of stay. 

The Visit Scotland guidance, which was published in October 2024, provides explanatory notes for accommodation suppliers as to how they should operate the scheme, should their local authority choose to implement it.  

 VAT 

The section on VAT in the Visitor Scotland guidance raises some questions.  The guidance states that the SVL should be included in the accommodation provider’s VAT turnover, and that VAT is also deemed to be due on the value of the levy collected. The example computations in the guidance illustrate this position.  

The VAT guidance section from the Visit Scotland pamphlet also appears to have been replicated on the Edinburgh Council website and is thus available for all those in the catchment area to read and act upon.  

It isn’t currently clear why the SVL should count as turnover for VAT purposes as it seems inequitable to treat collection of the SVL by the accommodation provider who then passes it on to the local authority as a “supply” for VAT purposes (whether exempt, zero or standard-rated). In a similar way, it appears that to apply VAT to the levy itself is anomalous, because it isn’t technically a supply, but a Levy (or tax).

We’re currently consulting with the Scottish government and HMRC to understand the source of the VAT guidance and whether there is a deemed supply at one or both stages of the collection from the visitor and payment of the levy to the Local Authority. If the act of collecting the SVL from visitors staying in overnight accommodation transpires to be a VATable supply, then it is correct to include it in turnover – if not, it isn’t.

The ICAS Tax team have reviewed the UK VAT legislative provisions (see for example 709/3) which concern themselves with hospitality sector matters about tourist taxes and whether they constitute a supply for VAT purposes, but there appears only to be a HoC Library insights pamphlet which doesn’t refer to VAT. Scotland is the first UK devolved jurisdiction to introduce a tourist tax, so other UK precedent materials aren’t available.

At present, we’re unsure as to whether, in their role as delegated authorities by the Scottish government, this is a view the local authorities/Visit Scotland have formed independently or whether it is based on specific instructions sought from HMRC. VAT is of course a UK reserved tax and Scotland doesn’t have powers over how it is charged.

The Community Infrastructure Levy and VAT

A precedent does however exist for local authorities not to charge VAT on developers to make improvements to local infrastructure. Paragraph 2 of the guidance at VATGPB8660 - Other local authority activities: miscellaneous (A to E): Community Infrastructure Levy - HMRC internal manual - GOV.UK reads: 
 
“The levy is used by local authorities to pay for improvements to the local infrastructure to promote development of the area. As the local authority doesn’t make any direct supply of goods or services to the developer the levy is outside the scope of VAT.”

What accountants and tax advisers need to do

We are consulting with Scottish government and HMRC to clarify this VAT point. In the meantime, we recommend that conversations are held with clients involved in the provision of hotel and similar accommodation to visitors to assist them with how to plan for the introduction of the SVL and make any budgetary and financial forecasting adjustments. Due to the questions over the VAT position, it is likely to be necessary to build in prudence and contingency until the position is clearer.