As you may have heard, it seems like HMRC is keeping a close eye on people in the short-term property letting industry. Whilst it appears they’re mainly on the hunt for unpaid income tax, we can’t ignore the possibility that VAT might also be brought under the spotlight.
We’ve been considering the VAT situation for our clients who offer short-term accommodations, including those with leisure and holiday rentals, as well as those used by contractors and business travellers.
Over to Claire…
If a business rents out short-term accommodation in a property that they own on a freehold or long leasehold basis, it’s generally agreed that the income from that activity is taxable for VAT purposes. Basically, if the business isn’t already VAT registered, this income contributes towards the VAT registration threshold (which is usually £85,000 per rolling 12 month period). If the business is already VAT registered, the income is subject to the standard VAT rate of 20%.
Things get a bit trickier when a business buys in and resupplies accommodation on a more short-term basis. An example is where a business rents in accommodation for a period of time and then rents it out at a margin.
In this case, there are two possible VAT outcomes:
- The business offers the accommodations as what is terms an ‘in-house’ supply of their own accommodation. In this situation, the total income from the supply of the accommodation is taxable for VAT purposes, as I outlined earlier.
- The business buys in and resupplies accommodation as a principal without making significant changes. In this case, it qualifies as a designated travel service for the purposes of VAT Tour Operators Margin Scheme (TOMS). If the accommodation falls within TOMS, the VAT outcome is a bit different from an in-house supply of accommodation.
One specific feature of supplies of services, like accommodation, that fall within the TOMS is that, for VAT registration purposes, it’s not the turnover from the supplying such accommodation that is relevant when considering the above VAT registration test. Instead, it’s the margin achieved, as calculated under the TOMS rules.
Under the TOMS, the margin is the difference between the purchase price and the selling price of the designated travel services. So for an accommodation only service, this would be the difference between what is charged to the customers and what is paid to the property owner in respect of the accommodation.
Now, since accommodation is often rented out to private individuals who can’t claim back VAT, many suppliers prefer not to register for VAT if they can avoid it. The TOMS VAT registration rules actually offer a clear advantage over the standard rules in this regard.
However, the line between whether accommodation falls within the standard VAT scheme or TOMS can be quite fine. Just one example of how fine the line can be found in HMRC’s guidance where they say:
“If you hire, lease or rent accommodation under an agreement whereby you take responsibility for the upkeep of the property and you are required to undertake any maintenance to the fabric of the building (that is, not just cleaning and changing towels or bed linen and so on), you are making an in-house supply of accommodation.”
Incorrectly treating a supply of accommodation under TOMS instead of as an in-house supply can lead to both serious and costly consequences, including retrospective VAT registration, together with retrospective liabilities and financial penalties.
Here to help review your VAT affairs
VAT for those in the short-term rental industry is complicated, and as I’ve already outlined, getting it wrong comes with serious risk. We’re therefore, here to help.
Contact your local DJH Mitten Clarke office to arrange a review of your VAT affairs.