According to HMRC’s guidance, income from letting residential property is exempt from VAT but your accountant thinks you should have been charging it. Who’s correct?
Exempt or not?
Charging rent for the use of residential accommodation is usually exempt from VAT. But, as with most tax rules, there are exceptions. For example, hotel accommodation is excluded from the exemption. The VAT position is similar for income from letting holiday accommodation. However, like other business activities this doesn’t mean that you’re required to register for VAT.
Registration
The usual registration rules apply. Therefore, you’re only required to register if your turnover exceeds the registration limit of £85,000 in the last twelve months.
Trap. If you’re already registered for VAT, you must also add it to the rent etc. you charge your holiday home customers and report it on the same VAT return. This only applies if your holiday home is owned by the same people as your VAT-registered business. For example, if your VAT-registered business is run through a company, but you personally own the holiday home, each business is considered separately for registration purposes. Similarly, if your registered business is a sole trader, but you own your holiday home jointly, say with your spouse, HMRC will accept them as separate businesses for VAT.
Tip. It’s possible therefore to legitimately dodge registration by transferring a share of the holiday home, and thus the rental income, to someone else. You need only transfer a very small share of the property rental business for this to work.
VATable supplies
If your holiday rental business is registered, either by itself or with another of your businesses, you must charge VAT at the appropriate rate on all services you provide your customers, not just the rent. For example, it applies to where you make separate charges for laundry, catering and transport (unless it’s in a vehicle that seats ten or more).
Pros and cons of registration
Registering your holiday letting operation for VAT has two obvious drawbacks; a little more admin and it an increases the amount you need to charges your customers, which might make your property less competitive. On the other hand, it could reduce your running costs considerably.
Example. Jack and Jill own a cottage in a seaside town which they occupy for about ten weeks per year. The rest of the time it’s available for letting. The property is re-roofed at a cost of £12,000. At the same time Jack and Jill add a conservatory which costs £18,000 – a total of £30,000 (including VAT). Based on their current use of the property they reclaim £4,000 of the VAT (i.e. 10/52 approximately).
Tip. Being registered means you can reclaim VAT on all your running costs and other bills, e.g. repairs or improvements. This tax break might outweigh the potential loss of competitiveness that results from having to increase your rent to include VAT.