Holiday Let Tax & VAT Guide
Planning a holiday is an exciting time, but there are few things that can dampen the joy like taxes and VAT.
Whether you own a luxurious holiday let or you're considering purchasing one, understanding the tax implications is crucial for your financial planning.
In this article, we will explore the world of holiday let taxes and VAT, providing you with the key information you need to navigate this complex landscape.
From income tax and capital gains tax to council tax and business rates, owning a holiday let involves various tax obligations. We will delve into each of these taxes, explaining how they are calculated and what you need to do to ensure compliance.
Additionally, we will explore the option of VAT registration for holiday lets, detailing the advantages and disadvantages, and providing guidance on when it may be necessary.
By the end of this article, you'll have a solid understanding of the tax considerations that come with holiday let ownership. So, if you're ready to get your finances in order and make the most out of your holiday let investment, let's dive into the world of holiday let taxes and VAT.
What is VAT ?
Value Added Tax (VAT) is a tax applied to the price of certain goods or services that are bought and sold within the UK.
Most goods and services are subject to the standard VAT rate of 20%, while some, such as home energy and children’s car seats, are subject to a VAT rate of 5%, and most food and children’s clothing are subject to a 0% VAT rate.
Some items, such as insurance, are exempt from VAT.
Is income from holiday accommodation subject to VAT ?
This is the big question for owners and the answer is yes. Income from self-catering holiday accommodation falls within the scope of VAT, so if the gross income from your furnished holiday let (FHL) exceeds the VAT threshold, it is compulsory to register.
The income from property that qualifies as UK holiday accommodation will be standard rated for VAT. This assumes that the property is not let out on a long-term residential basis, but rather as short-term, furnished sleeping accommodation that is held out for visitors.
When do I need to register?
From the 1st April 2024, the VAT threshold will be increased from is £85,000 to £90,000. It’s important to note that the threshold is measured on a rolling 12-month period rather than a fixed period like a calendar year or tax year.
The registration limit is not applied on a business-by-business basis – it relates to all of the business activities undertaken by a particular taxpayer (employment and other investment income do not count).
Example: if you own a farm with a turnover of £75,000 and buy or develop a barn for self-catering accommodation that generates an income of £16,000 then the threshold has been breached and you need to register to bring both the farm and FHL within the scope of VAT.
The same principle will apply if you own multiple properties; even if individually they are below the threshold, it is the consolidated income that will be assessed for VAT.
How do I register for VAT ?
It’s important to seek advice from a tax professional before completing your VAT registration.
The actual registration process is very simple and can be completed online via the HMRC website.
Once your application is processed and approved, HMRC will issue your VAT Registration Certificate.
This certificate confirms:
Your VAT number,
The date of your first VAT return and payment,
The 'effective date of registration.
This is the date you went over the threshold or the date you asked to register if it was voluntary.
Then, once registered, VAT will be included on all your taxable income.
You can usually reclaim VAT paid on business-related purchases - although not all expenditure is subject to VAT, like the cost of a self-employed housekeeper.
Common Mistakes to Avoid When Dealing with Holiday Let Taxes and VAT
When it comes to managing the tax and VAT obligations of a holiday let business, there are several common mistakes that owners can make. Avoiding these mistakes can help to ensure that you remain compliant with the relevant tax laws and regulations.
Not registering for VAT on time
One of the most common mistakes is failing to register for VAT.Failing to do so can result in penalties and back-dated VAT payments, which can be a significant financial burden.
Not understanding your numbers
Another common mistake is incorrectly calculating the number of days that the property is available for let and the number of days it is actually let.
This is important because it determines whether your property qualifies as a furnished holiday let, which can have significant tax advantages.
Keeping accurate records of your property's availability and occupancy is essential to ensure that you are claiming the appropriate tax deductions and allowances.
Keeping a record of your finances
Finally, many holiday let owners fail to keep accurate and up-to-date records of their income and expenses. This can make it difficult to claim the appropriate tax deductions and allowances, and can also increase the risk of an audit or investigation by HMRC.
It's important to keep detailed records of all of your holiday let-related income and expenses, and to work closely with a qualified accountant to ensure that you are claiming all of the deductions and allowances that you are entitled to.
You can easily do this by speaking to an accountant and signing up for an accounts package.
What is the Flat Rate Scheme for VAT?
Under the standard VAT scheme, a business usually pays HMRC the difference between the VAT charged on turnover and the amounts recovered on expenditure.
Example: the VAT on your marketing agent’s commission fees can be deducted from the VAT due on your rental income before you pay over the net amount to HMRC. The Flat Rate Scheme is much simpler and is calculated as a fixed percentage of your gross turnover.
On the Flat Rate Scheme, you pay over a lower percentage of your sales but you do not reclaim VAT on your purchases, except for capital expenditure exceeding £2,000.
The flat rate for accommodation is 10.5%. As an added bonus, you receive a 1% discount in your first year of registration.
If the goods (moveable items or materials) you buy for your FHL cost less than either 2% of your turnover or £1,000 a year, you’ll be classed as a limited-cost business.
If this is the case, your flat rate will be 16.5%. You can also include the cost of gas and electricity in this.
How to register
If you’re interested in the Flat Rate Scheme, you can register (the option is available during the online registration process) if you expect your turnover to be £150,000 or less in the next 12 months.
The turnover figure is excluding VAT, so a gross turnover of £167,598 assuming the 10.5% flat rate for self-catering accommodation.
You must leave the flat rate scheme if you expect your gross income in the next 12 months to exceed £230,000.
How much VAT do I charge?
Self-catering accommodation is a price-sensitive market, so careful consideration should be given to pricing and the impact of VAT on your income. It’s unlikely your guests will be VAT registered so the price they see advertised is the price they pay.
This will effectively mean the VAT impact will need to be absorbed in the marketed price, an effective 1/6 drop in turnover (based on a 20% VAT rate). This will be lower if you are registered on the flat rate scheme.
How much additional income is needed to compensate for the VAT impact?
For simplicity, the following example ignores VAT recovered on running costs and services. The amount of additional income required to compensate for the impact of VAT on your gross income will be less if input tax can be recovered on overheads.
VAT Details
The example illustrates that gross income would need to increase by 20% to absorb the impact of becoming VAT registered on the standard scheme.
Under the flat rate scheme, the additional income required to compensate for the VAT impact is lower at 11.7%, as illustrated in the example below.
What expenses can I reclaim VAT on ?
If you are not using the Flat Rate Scheme, the VAT on goods and services purchased in relation to your FHL can usually be reclaimed. However, you can only recover the FHL proportion of VAT on expenses that have an element of private use and you cannot reclaim VAT on private expenses.
Further guidance on what can and cannot be reclaimed is provided by HMRC here.
Can I reclaim VAT on costs incurred before registration ?
You can claim VAT incurred on certain purchases made before registration. However, it’s important to remember that there is a time limit of:
Four years before the date of registration for goods you still have.
Six months for services.
It is important to note you can only reclaim VAT on purchases in relation to the business registered.
VAT on build or renovation costs?
If the build costs exceed £250,000, excluding VAT, and you were to reclaim the input VAT in connection with this, the property in question would be subject to what is known as the Capital Goods Scheme (CGS).
Essentially, the CGS is a method of recovering VAT paid on purchasing assets over ten years. During this period, it’s revisited each year to ensure the amount of VAT reclaim is still accurate based on the assets’ current usage.
Tax Deductions and Allowances for Holiday Let Businesses
In addition to the FHL capital allowance, there are a range of other tax deductions and allowances that can be claimed by holiday let owners. These can include:
Mortgage interest relief: You can claim tax relief on the interest paid on any mortgages or loans used to finance the purchase or improvement of your holiday let property.
Repair and maintenance costs: The costs of repairing and maintaining your holiday let, such as painting, decorating, and general upkeep, can be claimed as a deductible expense.
Utilities and other running costs: The costs of utilities (e.g., electricity, gas, water), cleaning, and other running expenses can be claimed as deductible expenses.
Insurance premiums: The cost of insuring your holiday let, including buildings and contents insurance, can be claimed as a deductible expense.
Professional fees: Fees paid to accountants, lawyers, or other professionals for advice and services related to your holiday let business can be claimed as deductible expenses.
It's important to keep detailed records of all of your holiday let-related expenses and to claim the appropriate deductions and allowances on your tax return.
This can help to reduce your overall tax liability and improve the profitability of your holiday let business.
Furnished Holiday Let Capital Allowances
What are capital allowances ?
Capital allowances are a type of tax relief that allows you to deduct the cost of certain assets, such as furniture, fixtures, and equipment, from your taxable income. This can be a significant benefit, as it can help to offset the costs of setting up and maintaining your holiday let.
The most relevant type of capital allowance for holiday let owners is the furnished holiday let (FHL) capital allowance. This allows you to claim a deduction for the cost of items that are used in the holiday let, such as beds, sofas, and kitchen appliances. The rate of the FHL capital allowance is 100%, which means that you can claim the full cost of the asset in the year of purchase.
How to be eligible for capital allowances
To be eligible for the FHL capital allowance, your holiday let must meet certain criteria, including being available for letting for at least 210 days per year and being let for at least 105 days per year.
Additionally, the property must be furnished to a standard that is suitable for holiday lettings.
If your holiday let meets these requirements, you can claim the FHL capital allowance on your tax return, which can provide a significant boost to your overall profitability.
How Much Are Holiday Let Business Rates ?
What is business rates ?
Business rates are a form of property tax that is charged on non-domestic properties, which includes holiday lets. The amount you'll need to pay can vary significantly depending on the location, size, and value of your property.
How are business rates calculated
The Valuation Office Agency (VOA) is responsible for assessing the rateable value of your holiday let, which is the estimated annual rental value of the property. This rateable value is then used to calculate your business rates. The formula for calculating business rates is: Rateable Value x Business Rate Multiplier = Business Rates Payable. The business rate multiplier is set by the government and is adjusted annually.
Business rates relief
It's important to note that there are some exceptions and relief schemes that can help reduce the amount of business rates you need to pay.
For example, small business rate relief is available for properties with a rateable value of less than £15,000, and this can provide a significant discount on your rates.
Some local authorities may offer additional discounts or exemptions for holiday lets, so it's worth checking with your local council to see what options are available to you.
Common Questions Around VAT On Furnished Holiday Let’s Answered
What is Making Tax Digital (MTD)?
MTD is an initiative that sets out to make it easier for businesses and individuals to manage their tax. As part of this initiative, VAT registered businesses are required to use the MTD service to keep records digitally and use software to submit their VAT returns.
For owners of Furnished Holiday Lets (FHLs) who are registered for VAT, MTD applies to your business just as it would for any other VAT registered business.
What records must I keep when VAT registered ?
You must keep digital records of your VAT transactions. A digital record is a computerised version of an item of data. This includes the time and date of a transaction, the value of the transaction, and the rate of VAT charged, among other details. This could include transactions such as income from lettings and purchases for property maintenance.
Any invoices or receipts related to your VAT records should be retained in their original format, which could be electronic or paper.
Your records must be complete, accurate and readable, and you must keep them for at least six years.
How do I submit a VAT return ?
To submit VAT returns, you'll need to use software or a set of software programs that are compatible with MTD for VAT. This means they can connect to HMRC's application programming interface (API) platform.
The software should be able to keep records, prepare VAT returns using the digital records, and communicate with HMRC digitally via their API platform. HMRC provides a tool to help find MTD compatible software.
To submit your VAT return, you'll need to create a VAT online account, also known as the Government Gateway account.
If you owe VAT to HMRC, you'll need to pay this amount by the deadline indicated on your VAT return. There are various ways to pay, including Direct Debit and bank transfer.
Are there any other factors to consider about VAT registration?
For self-catering complexes with five or more properties, the rateable value is based on a percentage of fair maintainable trade (FMT). The FMT is the gross turnover excluding VAT.
Registering for VAT and requiring to pay a proportion of your gross revenue to HMRC will lower your FMT.
We recommend speaking with the Valuation Office and engaging with the “Check, Challenge and Appeal” process to ensure your rateable value is calculated on the correct FMT figure.
I no longer wish to be VAT registered – can I deregister?
Of course! Once your turnover falls below the £88,000 deregistration threshold, you can apply to cancel your registration here.
I have multiple properties that will collectively exceed the VAT threshold, can I split the ownership to avoid registering?
HMRC sees the practice of disaggregation as tax avoidance and has set rules to ensure only legitimate ‘business splitting’ occurs.
We recommend speaking with a tax specialist who has experience on the matter and a good understanding of your current income and investments before taking any action.
The property is occupied for residential letting during the off-season, do I still need to register for VAT?
There is specific guidance from HMRC regarding off-season letting, which you can read more about in the 5.6 of the government guidance.
In short, the guidance states that the income from the residential let will be treated as exempt from VAT. This means any income will not be included in your gross taxable turnover.
There are other things worth considering when making your property available for residential letting during the off-season:
· If you are VAT registered, you may not be able to fully recover the VAT on your allowable expenses. As some of your revenue will be exempt from VAT, you will fall under the scope of partial exemption rules.
· There will be practical issues to consider, such as ensuring the residential letting contract does not overlap with self-catering accommodation availability, and the property is vacated with sufficient time for a refresh before guests arrive.
It’s worth bearing in mind that potential benefits gained through registering for business rates and claiming small business rates relief would be lost if the property does not meet the availability and occupancy rules.
Can I manage my availability to ensure I do not breach the VAT threshold?
You can manage your calendar to ensure the VAT threshold isn’t breached but be wary not to reduce availability so much that you fail the FHL occupancy criteria and rules to qualify for business rates (and small business rates relief).
I think my turnover has exceeded the VAT threshold for some time – can I register late?
Yes, you absolutely can. Of course, if you register late you will have to pay all the VAT calculated from when you should have registered. You may also be liable to a penalty depending on how much you owe and how late your registration is.
I may only go over the threshold for a short period because of exceptionally high demand – do I still need to register?
If your turnover goes over the threshold temporarily you may be able to obtain a VAT registration exception.
Simply write to HMRC showing why you believe your taxable turnover will not exceed the deregistration threshold of £88,000 in the next 12 months and HMRC will consider granting you an exception.
Holiday Let Management
If you are interested in hassle free holiday let management for your holiday let property, get in touch and we can provide expertise on income, occupancy & make your investment hands off.