Holiday Rental VAT

As featured in The Southern Reporter - www.thesouthernreporter.co.uk

The letting of furnished holiday accommodation is within the scope of VAT regardless of whether HMRC’s qualifying conditions for furnished holiday lets (FHLs) are met. If the total turnover of a person running a FHL business exceeds the VAT registration threshold (£83,000 per year from April 2016) it is compulsory to register the business for VAT. This would result in VAT at the standard rate of 20% being chargeable on rental income. This would have the effect that owners would have to declare 1/6 of their gross rental income from lettings substantially reducing the businesses profitability or increase rental amounts charged to holidaymakers which may have a detrimental impact on commerciality.

The registration limit relates to all business activities undertaken by a taxpayer therefore the turnover of all a person’s businesses are combined when assessing if the threshold is breached.

For example, if an individual has a retail business which turns over £71,000 and acquires a FHL property which turns over £15,000, the turnover threshold will be breached and the individual will have to register for VAT for both businesses. This could potentially be avoided with an appropriate business structure although care needs to be taken with such arrangements since HMRC have powers to aggregate businesses together for VAT purposes if they consider that the separate business arrangements are driven by a tax-avoidance purpose.

Owners could consider voluntary registration for VAT if it would be advantageous as a whole to claim VAT on their expenditure for example if large amount of funds are being spent on refurbishing a property.

For UK non-resident owners the VAT registration threshold is £1 where they have no ‘permanent’ business establishment in the UK. However if the non-resident owner appoints a UK managing agent in the UK and this is ‘the place where essential management decisions are made and the business’s central administration is carried out’ then the owner may have a UK establishment and the UK VAT registration threshold will apply.

UK‑based owners of overseas holiday property may have similar obligations to register for VAT or local sales taxes where they are letting holiday homes abroad and it would be important to obtain local tax advice to ensure any VAT obligations are understood.

It will be important for owners of furnished holiday accomodation to consider their VAT position and to take advice where appropriate. Should you require further assistance with this or any other tax matter, Mairi Drummond of Rennie Welch LLP specialises in the taxation of furnished holiday accommodation and can be contacted on (01573) 224391 or at mairi.drummond@renniewelch.co.uk.