Taxable income and VAT registration

Unlike residential lettings which are VAT exempt, income from FHL is taxable. With the current VAT registration threshold standing at £90,000, many landlords will not need to register, particularly if their only taxable income is from those FHLs.

However, many landlords are not aware that you cannot separate different business activities undertaken by the same legal entity even if individually they fall below the registration threshold. For example, a sole proprietor landscape gardener with taxable income of £70,000 topped up with £24,000 from a FHL will exceed the £90,000 threshold, meaning they are required to register for VAT.

Another common mistake is thinking they can divide properties between more than one legal entity to keep below the threshold. For example, a husband and wife might each own one FHL each with income of £45,000 and £55,000 respectively. HMRC would almost certainly consider them to be a single taxable person with the threshold having been exceeded and direct that they should be brought together for the purposes of VAT registration.

There are of course circumstances where spouses or close family members can operate separate businesses below the registration threshold and the physical and economic separation between the businesses will be the key factors. For example, it is unlikely that an IT consultant whose wife owns a FHL would be considered to be in the same business in terms of VAT registration.

If you are in any doubt about whether you have exceeded the VAT registration threshold, it is important that you determine the position quickly, as there could be an assessment for VAT due and potentially a penalty for late registration.

Voluntary registration

Voluntary VAT registration is possible where taxable income is below £90,000 or there is an intention to make taxable supplies in the future. This can be beneficial, particularly if you are extending or refurbishing the FHL and will incur a significant amount of VAT on costs. It should be noted, however, where a FHL is being constructed from scratch, the works will be zero-rated provided it is designed as a dwelling and certain other conditions are met). VAT on costs (input tax) can only be recovered if you are VAT registered.

Registration will not always be beneficial because the income will then be subject to VAT. If increasing your prices to reflect VAT is economically viable, perhaps because of competition, VAT will need to be absorbed by the business.

Overseas properties and overseas owners

Extra care is needed if you own a FHL overseas or if you are a non-UK resident who owns a FHL here. Different countries have different VAT rules, and you may well find that there is no VAT registration threshold for FHL income overseas. If you are an overseas national with a FHL in the UK, there is no registration threshold and you will therefore need to register as soon as you have received any income.

The Tour Operators Margin Scheme (TOMS)

TOMS applies where there is a supply of “bought in” accommodation, for example, a tour operator buying in accommodation and supplying it on to a holiday-maker. Where TOMS applies, VAT is due on the margin only, i.e. between the bought in cost and the sale price, but any input tax is not recoverable.

Most FHL owners will not be affected by TOMS as they will own the property which they are letting – it is not “bought in”. However, the ongoing Sonder case is relevant to businesses that do not own the freehold of the property which they let.

Sonder acquired leasehold interests for apartments of generally two to 10 years. It then let them for shorter periods, generally a few days at a time. The First Tier Tribunal agreed with Sonder that TOMS applied, meaning VAT was only due on the margin. The Upper Tribunal has overturned that decision in HMRC’s favour, saying that TOMS did not apply and that VAT was therefore due on the whole consideration. A key factor was the difference between the length of the lease bought in by Sonder compared to the short lets it made to the end customers.

Sonder is likely to appeal against this decision and it is of course unknown what the final outcome of the case will be. If Sonder ultimately wins, it may be that FHL income will fall within TOMS where leasehold interests longer than 10 years are held by FHL owners, meaning VAT is only due on the margin.

For now, regardless of whether you own the freehold or leasehold interest in the FHL you let, you will need to determine whether you should be VAT registered, or if registering voluntarily might be beneficial.

If you are a landlord and require advice on any aspect of property taxation, please contact us today and a member of our team will be happy to help you.