It is a shame because it puts your prices up by 20%. Do you pass the extra onto the client or do you absorb it yourself and lose out on profit? It can be a difficult decision for many small holiday letters and serviced accommodation companies.
"But take heart that if your income is that high your business is obviously doing quite well!"
If you choose to absorb the VAT then when charging £100 per night, the money in your pocket reduces to £83.33 after VAT. If you had a nightly profit of £25 before you applied VAT to the bill, you now only have around £8.33 instead.
You could increase your nightly rate a little (but still below £100 + VAT) and split the difference with your client. An increase to £110 gives you £91.67 after VAT so it really is a balancing act in this case.
There will always be compromises to be made when you hit an income of £85,000 and need to start applying VAT. If you're renting out holiday lets then you're probably going to want to hide the VAT part in your advertised prices, however, for serviced accommodation, where the people paying the bill may be companies, you could separate out the VAT on your prices and let the company claim it back.
"Is there a simpler solution? Yes! Flat-rate VAT!"
Flat-rate VAT is used by UK businesses where specific conditions are met. For hoteliers and holiday lettings operators, this flat fee is 10.5%. So, when you rent out a room, you pay HMRC 10.5% of the price of the room inclusive of VAT and keep the rest.
So, for a nightly charge of £110 (which includes VAT), you would pay HMRC £11.55 which gives you £98.45 in your pocket. Far better than paying HMRC 20% as shown in the examples above.
However, using flat-rate means you can't claim VAT back on the everyday expenses of your holiday let or serviced accommodation business. You can claim:
VAT paid on vatable services invoices in the 6 months prior to your VAT registration date.
VAT paid on vatable goods invoices in the 4 years prior to registration, if those goods are still owned and used within the business.
Although it is important to get professional advice about VAT administration and claiming back from previous years could be an administrative nightmare, flat-rate VAT is actually quite easy to understand and action. You get to keep more money and you don't have the paperwork of standard VAT accounting.
Be aware though, a business can only register for flat-rate VAT when your income is less than £150,000, so if you've just tipped over the £85,000 threshold, then it's worth considering now. You also have to leave the scheme when your income exceeds £230,000 and use standard VAT accounting.
Until next time ...
Would you like to know more?
If you'd like to find out more about VAT on holiday lets and serviced accommodation and how you could register for flat-rate VAT then do give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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