An apparently innocuous idea, like temporarily renting out a property to visitors, can become complex and fall into a VAT trap when the rental turnover becomes significant, leading to compulsory VAT registration and associated considerations ...
What may seem like a simple decision to generate additional income could lead to a VAT trap!
Income from properties that qualify as UK holiday accommodation is subject to the standard VAT rate. This assumption holds true if the property is not let out on a long-term residential basis, but rather as short-term, furnished sleeping accommodation primarily intended for visitors.
"It is important to exercise caution when applying these rules, as exceptions exist!"
Airbnb is a typical example of a UK property being let to visitors under a similar arrangement. In such cases, the property owner needs to clarify contractual issues regarding billing. Is the property owner supplying the room to an organization in exchange for a standard fee, or directly to the individuals who use the property? Understanding this arrangement is crucial for invoicing and VAT recovery on associated costs, such as administrative or payment handling fees charged by the central organization.
The obligation to register for VAT arises once the property provider's taxable turnover exceeds £85,000 within a 12-month period. However, separate rules apply to 'non-established' providers of VATable supplies (such as those based in a non-UK country). In these cases, a zero registration threshold applies following the decision in Schmelz (C-97/09) by the European Court of Justice, which dealt with the rental of foreign-owned property.
"Providers in this situation should carefully consider their obligations!"
It is possible to voluntarily register for VAT before reaching the £85,000 threshold. However, property providers should carefully weigh the cost-benefit analysis of price increases against the potential VAT recovery. By not charging VAT, property providers have a competitive advantage over hotel chains. However, in the case of well-situated city properties, adding VAT may not significantly disadvantage bookings.
VAT registration applies to the property provider, i.e. the owner of the property. For individuals, VAT registration not only affects their property income, but also renders all potentially taxable income subject to VAT, which can be burdensome. Conversely, all such personal income contributes to the VAT registration threshold. Therefore, starting to let out a property could push an individual over the VAT registration threshold.
In the case of larger Airbnb-type operations involving multiple properties, it may be more advantageous (for VAT purposes) to own the properties in a separate entity, such as a company or even a partnership. However, transferring property ownership involves various tax and legal considerations.
"A partnership route might be a more viable option!"
What may initially seem like a simple decision to generate additional income from an existing asset can quickly become a complex matter. Thoughtful upfront structuring and professional advice can help mitigate potential downsides.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about vat traps when renting holiday lets, 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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