VAT – Ouch!
The majority of FHL customers are unable to reclaim any VAT charged to them. Given the price-sensitive nature of the industry, a VAT-registered FHL business would be forced to potentially absorb the VAT rather than charge it to customers. In the worst case, this would effectively result in a 1/6 drop in income and potentially reduce profit by an equal amount.
The example shows that an income of £1 could cost the FHL business £14,167 year on year. Ouch!
Other Business Activities
Care should be taken if the owner/s of the FHL have other business activities. In this case the income from the other business activities and the FHL must be taken into account in determining whether the VAT threshold has been breached.
For example, John is self-employed with a turnover of £70,000 per year. John inherits a property and receives FHL income of £20,000 in the first year. The combined income for the two businesses amounts to £90,000. As such, John must register for VAT and charge VAT on both his self-employed income and also his FHL income.
How is the taxable turnover (i.e. income) determined for VAT registration purposes? When the invoice is raised, service performed or payment received?
HMRC state that invoices cannot be used in determining taxable turnover for VAT registration purposes. Taxable turnover is recognised the earliest of:
- the date a service was performed (when the rental takes place)
- the date a payment was received
Generally, a deposit is received on booking and the balance is paid prior to arrival. Subsequently, it is the date of payment that determines the taxable turnover for VAT registration purposes and not the total amount when the rental takes place.
This means the FHL businesses may need to register for VAT earlier than expected. FHL have been in high demand due to Covid 19 travel restrictions and many FHL businesses have taken deposits for bookings for 2022 and 2023. These deposits may have inadvertently meant that the FHL business has breached the taxable turnover for VAT registration purposes.
The tax treatment of Furnished Holiday Let can be complicated. Particularly, with regards to VAT and the number of problems and pitfalls that may arise. These problems can be avoided and/or mitigated with careful tax planning.
Get in touch with Jonathan Jones, our expert in all things to do with property accounts and tax, for further advice or information.