Holiday accommodation – watch out for VAT

Published by Colin Laidlaw on 11 January 2022

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With question marks still remaining around Covid-19 and travel the expectation is that more holiday makers will look to the UK next year rather than go abroad for their annual holiday (so called staycation). If you have a number of buy to let properties and are thinking of taking advantage of this increasing trend by changing them to holiday accommodation for the summer (or longer) there is a potential VAT trap that you need to be aware of.

As a holiday home provider it is important to make sure you understand your VAT position, and if you need to register for VAT.

For the purposes of this article, we will be considering properties located in the UK. If the holiday accommodation you provide is outside the UK, then you will need to consider the VAT regulations of that country.

Why should you be concerned?

It is a basic premise of UK VAT law that we do not tax residential accommodation; rent of domestic property for use as the tenant’s permanent home is exempt from VAT.  However, short-term letting of property as holiday accommodation is subject to VAT.

If your business is already registered for VAT you will need to charge VAT which may affect pricing.  If your business is not currently VAT registered, does it need to be?

What is holiday Accommodation

Holiday accommodation includes but is not restricted to:

  • any house/ flat
  • chalet
  • villa
  • beach hut
  • tent
  • caravan
  • houseboat

which is held out for sale (advertised) as suitable for holidays or for leisure use.

Holiday accommodation is not to be mistaken with hotels, inns and boarding houses, which are treated differently for VAT purposes.

I am not registered – do I need to charge VAT?

The current threshold for UK VAT registration is £85,000, and if your income from rental of holiday accommodation is above this threshold for any successive 12-month cycle, the business will be required to register for VAT. It is also possible to voluntary register for VAT before you reach this threshold, but this would mean that you would also be required to charge VAT to customers.

Failing to register when required to do so, by breaching the threshold may lead to penalties from HMRC. The amount of the any penalty will be dependent on how late you are to register, and the amount of VAT due.

This threshold does not apply to non-established taxable persons (NETP). These are persons who have no physical presence in the UK but make taxable supplies in the UK. NETPs may have an obligation to register for VAT even if the income they make is under the UK VAT threshold.

Being VAT registered means that the rent is subject to VAT but it also has benefits as VAT incurred on costs while conducting business activities will be able to be reclaimed from HMRC. So as a property owner, if you were to buy new furniture or redecorate the holiday accommodation, you would be able to reclaim VAT incurred on those purchases.

What VAT is due?

As above, this accommodation will be subject to VAT if the owner is registered for VAT.

Due to Covid-19 the Government has introduced a temporary reduced rate of VAT for the supply of holiday accommodation.  This was 5% between 15 July 2020 and 30 September 2021 and is currently 12.5% until the 31 March 2022. The supply is normally taxable at the VAT standard rate of 20% and will revert to this from 1 April 2022.

Residential properties are not always treated as holiday accommodation as they may be in locations that have off-seasons for example, a residential property located on a holiday resort. If the accommodation is let during an off-season, then provided the property is let as residential accommodation for a period greater than 28 days, the supply can be treated as VAT exempt, so long as the trade of the area can be clearly seen as seasonal.

Keeping records of the tenancy agreement for this is important to show the property was let for residential purposes, in case of challenge from HMRC.

Conclusion

If you have let out your property as holiday accommodation you need to consider the VAT position

  • if you are VAT registered, VAT will be due and you should look to correct any historical position, bearing in mind the reduced rate.
  • if you are not VAT registered, do you need to be?

You can find out more information on holiday accommodation, in our article ‘5 top tax tips for holiday lets’.

If you have any questions on this or any other VAT matter please talk to one of our VAT experts on +44 (0)330 124 1399 or contact us here.

 

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