2022 guide to VAT for Furnished Holiday Lets

In the news

With the rise in popularity of UK staycations, more and more owners of furnished holiday lets (FHLs) are seeing their revenues approach the VAT threshold of £85,000. Couple this with a freeze on the threshold until 31 March 2024, and we expect VAT will be something a considerable number of owners will soon need to start thinking about. To help you navigate through these waters successfully, we’ve laid out some key facts and figures surrounding VAT.

 

What is VAT?

 

Value Added Tax (VAT) is a tax applied to the price of certain goods or services that are bought and sold within the UK.

Most goods and services are subject to the standard VAT rate of 20% while some, such as home energy and children’s car seats, are subject to a VAT rate of 5% and most food and children’s clothing is subject to a 0% VAT rate.

Some items, such as insurance, are exempt from VAT.

 

Is income from holiday accommodation subject to VAT?

 

This is the big question for owners and the answer is absolutely. Income from self-catering holiday accommodation falls within the scope of VAT, so if the gross income from your furnished holiday let (FHL) exceeds the VAT threshold it is compulsory to register. Don’t worry though, we’ve outlined everything you need to know below.

The income from property that qualifies as UK holiday accommodation will be standard rated for VAT. This assumes that the property is not let out on a long term residential basis, but rather as short term, furnished sleeping accommodation that is held out for visitors. 

 

When do I need to register?

 

 

The current VAT threshold is £85,000 and it’s been frozen until at least 31 March 2024. It’s important to note that the threshold is measured on a rolling 12 month period rather than a fixed period like a calendar year or tax year.

The registration limit is not applied on a business by business basis – it relates to all of the business activities undertaken by a particular taxpayer (employments and other investment income do not count).

For example, if you own a farm with a turnover of £75,000 and buy or develop a barn for self-catering accommodation that generates an income of £11,000 then the threshold has been breached and you need to register to bring both the farm and FHL within the scope of VAT.

The same principle will apply if you own multiple properties; even if individually they are below the threshold, it is the consolidated income that will be assessed for VAT.

 

How do I register for VAT?

 

It’s important to seek advice from a tax professional before completing your VAT registration.

The actual registration process is very simple and can be completed online via the HMRC website. Then, once registered, VAT will be included on all your taxable income.

You can usually reclaim VAT paid on business related purchases - although not all expenditure is subject to VAT, like the cost of a self employed housekeeper.

 

What is the Flat Rate Scheme for VAT?

 

 

Under the standard VAT scheme, a business usually pays HMRC the difference between the VAT charged on turnover and amounts recovered on expenditure. For example, the VAT on your marketing agent’s commission fees can be deducted from the VAT due on your rental income before you pay over the net amount to HMRC.

The Flat Rate Scheme is much simpler and is calculated as a fixed percentage of your gross turnover.

On the Flat Rate Scheme, you pay over a lower percentage of your sales but you do not reclaim VAT on your purchases, except for capital expenditure exceeding £2,000.

The flat rate for accommodation up to 31 March 2022 is 5.5%, which will return to the usual rate of 10.5% from 1 April 2022. As an added bonus, you receive a 1% discount in your first year of registration.

If the goods (moveable items or materials) you buy for your FHL cost less than either 2% of your turnover or £1,000 a year, you’ll be classed as a limited cost business. If this is the case, your flat rate will be 16.5%. You can also include the cost of gas and electricity in this.

If you’re interested in the Flat Rate Scheme, you can register (the option is available during the online registration process) if you expect your turnover to be £150,000 or less in the next 12 months. The turnover figure is excluding VAT, so a gross turnover of £167,598 assuming the 10.5% flat rate for self-catering accommodation.

You must leave the flat rate scheme if you expect your gross income in the next 12 months to exceed £230,000.

 

How much VAT do I charge?

 

Self-catering accommodation is a price sensitive market, so careful consideration should be given to pricing and the impact of VAT on your income. 

It’s unlikely your guests will be VAT registered so the price they see advertised is the price they pay.

This will effectively mean the VAT impact will need to be absorbed in the marketed price, an effective 1/6 drop in turnover (based on a 20% VAT rate). This will be lower if you are registered on the flat rate scheme.

 

How much additional income is needed to compensate for the VAT impact?

 

For simplicity, the following example ignores VAT recovered on running costs and services. The amount of additional income required to compensate the impact of VAT on your gross income will be less if input tax can be recovered on overheads.

 

A small section of an Excel spreadsheet

 

The example illustrates gross income would need to increase by 20% to absorb the impact of becoming VAT registered on the standard scheme.

Under the flat rate scheme, the additional income required to compensate the VAT impact is lower at 11.7%, as illustrated in the example below.

 

A small section of an Excel spreadsheet

 

What expenses can I reclaim VAT on?

 

If you are not using the Flat Rate Scheme, the VAT on goods and services purchased in relation to your FHL can usually be reclaimed. However, you can only recover the FHL proportion of VAT on expenses that have an element of private use and you cannot reclaim VAT on private expenses.

Further guidance on what can and cannot be reclaimed is provided by HMRC here.

 

Can I reclaim VAT on costs incurred before registration?

 

You can claim VAT incurred on certain purchases made before registration. However, it’s important to remember that there is a time limit of:

·        Four years before the date of registration for goods you still have

·        Six months for services

And you can only reclaim VAT on purchases in relation to the business registered.

 

What about the VAT on build or renovation costs?

 

 

Great question! If the build costs exceed £250,000, excluding VAT, and you were to reclaim the input VAT in connection with this, the property in question would be subject to what is known as the Capital Goods Scheme (CGS).

Essentially, the CGS is a method of recovering VAT paid on purchasing assets over ten years. During this period, it’s revisited each year to ensure the amount of VAT reclaim is still accurate based on the assets’ current usage.

 

I no longer wish to be VAT registered – can I deregister?

 

Of course! Once your turnover falls below the £83,000 deregistration threshold, you can apply to cancel your registration here.

 

I have multiple properties that will collectively exceed the VAT threshold, can I split the ownership to avoid registering?

 

HMRC sees the practice of disaggregation as tax avoidance and has set rules to ensure only legitimate ‘business splitting’ occurs. 

We recommend speaking with a tax specialist who has experience on the matter and a good understanding of your current income and investments before taking any action.

 

The property is occupied for residential letting during the off-season, do I still need to register for VAT?

 

 

There is specific guidance from HMRC regarding off-season letting, which you can read more about in the 5.6 of the government guidance. In short, the guidance states that the income from the residential let will be treated as exempt from VAT. This means any income will not be included in your gross taxable turnover.

There are other things worth considering when making your property available for residential letting during the off-season:

·        If you are VAT registered, you may not be able to fully recover the VAT on your allowable expenses. As some of your revenue will be exempt from VAT, you will fall under the scope of partial exemption rules

·        There will be practical issues to consider, such as ensuring the residential letting contract does not overlap with self-catering accommodation availability, and the property is vacated with sufficient time for a refresh before guests arrive.

·        There are tax benefits available to self-catering properties qualifying as Furnished Holiday Lets. We have summarised the benefits of a FHL here. Basically, a property will be treated as a FHL if it meets the following occupancy requirements, which may be a challenge if residential letting for long periods:

- Be available for commercial holiday letting to the public for at least 210 days (30 weeks).

- Be actually let commercially as holiday accommodation to the public for at least 105 days (15 weeks).

- If occupied by the same person for more than 31 days, have a total of no more than 155 days of such ‘longer term' occupation.

- It’s worth bearing in mind that potential benefits gained through registering for business rates and claiming small business rates relief would be lost if the property does not meet the availability and occupancy rules.

 

Can I manage my availability to ensure I do not breach the VAT threshold?

 

You can manage your calendar to ensure the VAT threshold isn’t breached but be wary not to reduce availability so much that you fail the FHL occupancy criteria and rules to qualify for business rates (and small business rates relief).

Remember, the VAT registration threshold will remain unchanged at £85,000 until at least 31 March 2024 so if you choose to cap your income to remain below the threshold, your margin will be eroded every year as cost inflation will not be able to be passed on to guests. 

 

I think my turnover has exceeded the VAT threshold for some time – can I register late?

 

 

Yes, you can. Of course, if you register late you will have to pay all the VAT calculated from when you should have registered. You may also be liable to a penalty depending on how much you owe and how late your registration is.

 

I may only go over the threshold for a short period because of exceptionally high demand – do I still need to register?

 

If your turnover goes over the threshold temporarily you may be able to obtain a VAT registration exception. Simply write to HMRC showing why you believe your taxable turnover will not exceed the deregistration threshold of £83,000 in the next 12 months and HMRC will consider granting you an exception.

 

We’re here to help.

 

If you have any other questions about VAT or have registered for VAT and need help understanding how to complete your returns, please do not hesitate to get in touch, we’re always here to help.

 

T: 01736 230 173

E: accounts@classic.co.uk

Related guides

Review outcome on business rates in England & Wales

The government released the consultation outcome following a review on business rates for self-catering accommodation. Find out more in this guide.

2022 guide to VAT for Furnished Holiday Lets

Here is our rundown of VAT for Furnished Holiday Lets in 2022 so you can navigate these waters with confidence.

Managed Services with Classic

Find out more about our complimentary Managed Holiday Letting Service with Classic Cottages.

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