On May 28, 2024, the Scottish Parliament passed groundbreaking legislation introducing the Scottish Visitor Levy, commonly dubbed the "tourist tax". This new legislation, expected to be implemented by Spring 2026, grants local councils the authority to impose a tax on overnight accommodations, aiming to funnel funds back into services and facilities predominantly used by tourists and business visitors. However, despite its noble intentions, the levy brings with it a slew of administrative complexities for the hospitality sector.
Having successfully passed the final parliamentary stage, the Visitor Levy (Scotland) Bill is on the verge of becoming law, pending Royal Assent. While Edinburgh and other councils advocated for a flat-rate scheme, Parliament opted for a percentage-based tax based on the price of accommodation, which aligns with their progressive tax system approach.
Who does this apply to?
The first question businesses will have is who does this apply to? In essence, the tourist tax is a transaction tax that is charged on the provision of "overnight accommodation". This encompasses any room or area provided to a visitor for residential purposes for a period of at least six hours. This includes hotels, hostels, Bed and Breakfast accommodations, caravan parks, and even campsites, but excludes visiting cruise ships. The Levy will impact the entire hospitality sector, including private landlords and providers of holiday lettings. Accommodations provided under council homelessness duties or for asylum seekers are exempt, following a last-minute amendment to the Bill.
Triggering Liability
Understanding when liability arises is crucial for businesses. There are two conditions that must be met before the liability will arise. The first condition is that there must be a purchase of a right to reside in overnight accommodation. This is normally at the point where the booking is made. The second is that the visitor must 'take entry' into the accommodation. Therefore, cancelled bookings and no-shows do not incur a liability, providing some relief to providers.
Calculating the Tax
The Visitor Levy (Scotland) Bill sets the parameters for how the tax will operate. However, the Levy's calculation is where complexity truly sets in. Each local council can set its own rate, if they choose to implement it at all, potentially leading to significant regional variations. Scottish Ministers can enact secondary legislation to cap the maximum rate.
The tax amount is determined by multiplying the "accommodation portion" of the transaction by the council's Levy rate. The accommodation portion is the VAT-exclusive charge for overnight accommodation, with allowable deductions for meals, drinks, parking (unless at a caravan park), laundry services, and entertainment.
The process won't be simple for providers offering multiple services, such as breakfast and access to other leisure facilities, in addition to the overnight accommodation. The starting point will be to estimate the "reasonable costs for facilities or services provided", and the number of persons accessing those services on the booking, and deduct them from the booking price to find the taxable amount. Special pricing models, like "three nights for the price of two" offers, add another layer of complexity.
Unlike the simpler flat-rate systems in other European countries, Scotland's progressive model aims to tax visitors based on their spending capacity. However, the Scottish Government's view is that it will be fairer to tax visitors in accordance with their means and so, the higher the price for the accommodation, the higher the tax should be.
Preparing for Change
In the next 18 months, councils considering the Levy must consult with local communities, businesses, and tourism agencies.
Accommodation providers should start reviewing their pricing strategies and business models to accommodate the new tax. As the ultimate liability falls on the accommodation provider, careful planning is essential to manage the cost determination and collection process.
Businesses also face the practical challenge of making quarterly payments and submitting returns as well as recordkeeping obligations. To minimize administrative burdens, providers might arrange with booking agencies to collect and remit the tax. However, direct bookings through a provider's website will require meticulous management. Penalties for late filings start at £100 plus 5% of the tax due, and will escalate if they remain unpaid, underscoring the importance of compliance.
The Scottish Visitor Levy represents a significant shift in the financial framework supporting Scotland's tourism sector. While it promises to enhance local services and facilities, the administrative demands it places on accommodation providers are substantial. As the implementation date approaches, businesses must adapt swiftly to ensure compliance and mitigate potential financial impacts. The next 18 months will be crucial as stakeholders navigate this new terrain, balancing the levy’s intended benefits against its operational complexities.
