General rules apply to the deduction of input VAT on purchases of inputs used for VAT-liable accommodation services. If a party provides taxable accommodation services as part of mixed activities, they may deduct input VAT in proportion to the share of taxable sales of goods and services (excluding VAT) in total annual turnover. If a property is used partly for accommodation services and partly for other purposes where no right to deduction exists, it is permitted to claim input VAT on purchased labor for improvements, repairs, and maintenance to the extent that such work directly relates to the part of the property used for taxable activities. A condition is that the supplier specifies on the invoice which part of the property the work relates to. If the work does not directly relate to a specific part of the property, input VAT may be calculated proportionally based on the floor area used for taxable activities relative to the total floor area of the property.

A person operating accommodation services in their home may not claim input VAT on inputs related to the acquisition or operation of residential housing, except for a clearly defined part of the property where the activity takes place, and only if that part is used exclusively for the business. If these conditions are not met, no input VAT deduction is allowed for the housing. Nevertheless, input VAT may be claimed on inputs that clearly relate to the accommodation service, such as purchases of beds, mattresses, and bedding.

If a party has no right to deduct input VAT, or only a partial right, they may apply for a refund of VAT on labor costs for construction work related to improvements or maintenance of the residential property. If commercial property (used for accommodation services) and residential property are located in the same building, a formal division between these two categories must be registered in the property register of Registers Iceland in order to claim input VAT on the property. If such registration exists, a registered party may claim input VAT on construction work, etc., relating to the commercial property, provided it is used solely for taxable activities and not in any way for residential purposes. If the conditions for input VAT deduction change for example, if a party ceases VAT-liable accommodation activities previously claimed input VAT on capital goods must be adjusted in accordance with the detailed rules set out in the regulation on input VAT.

9.2.1 Passenger cars used for passenger transport
It is permitted to deduct input VAT on the purchase of passenger cars that are used exclusively for passenger transport in tourism, provided that the activity is carried out under a special license from the Icelandic Transport Authority (Samgöngustofa), the vehicle is properly marked, and the license is kept in the vehicle. If the vehicle is used partly for passenger transport in tourism and partly for other purposes, no input VAT deduction is allowed for the vehicle, neither on its purchase nor its operation. Further information on the treatment of input VAT for passenger cars used in passenger transport can be found in guidelines on VAT treatment of vehicles.

9.2.2 Buses (group transport vehicles)
It is permitted to deduct input VAT on the purchase of a bus when it is used for VAT-liable activities. If the vehicle is used partly for VAT-liable activities and partly for other purposes, such as exempt activities, input VAT may be deducted in proportion to the use of the vehicle in taxable activities relative to its total use. The same applies to input VAT on operating costs of the bus when it is used for both taxable and exempt activities. Further information on the treatment of input VAT for buses can be found in guidelines on VAT treatment of vehicles.

The general rules on the deduction of input VAT on purchases of inputs for taxable activities apply to the operations of travel agencies and tour operators. Even if such parties engage exclusively in the sale of services that qualify as exempt turnover, they are nevertheless permitted to deduct VAT on inputs related to the activity as input VAT in accordance with the general rules. If a travel agency or tour operator carries out, to any extent, activities that fall under exempt activities—i.e. activities outside the scope of VAT—alongside taxable activities, the rules on input VAT for mixed activities apply, cf. further discussion in Chapter 8.