Understanding VAT for Furnished Holiday Lets
VAT on holiday homes is complex and sometimes baffling to the layperson. It’s imperative that, as owners of a furnished holiday let, you’re ultimately able to report your profits to HMRC. Which is why, as an expert holiday home letting agency we’re sharing our expertise. In this blog we’re going to navigate the complexities of VAT on your holiday cottage to ensure you’re compliant, highlight the tax implications and optimise your financial benefits.
What is VAT on Holiday Lets?
VAT is a tax which is applied to certain goods and services within the UK. The standard rate applicable is currently 20%. Value Added Tax is deemed payable on a holiday let because it’s considered by HMRC to be an investment. Basically when you let out your holiday cottage, you’re adding value and earning an income from your property.
If a homeowner rents their property to tenants on a long term residential contract they are not required to pay VAT. But this also means they are not able to claw back VAT in their expenses.
Whilst the most residential lets are VAT exempt, furnished holiday lets or FHL’s are subject to a standard rate of VAT. You will need to pay VAT to HMRC on the income generated by the holiday let. As an owner, you may also need to incorporate a VAT charge into your rental price which would then allow maintenance and management costs to be recouped through the VAT return.
VAT on Holiday Homes and Cottages
You will only need to pay VAT on your holiday home if your business income should exceed £90,000 which is the VAT threshold. You can choose to pay VAT if your income is less than the specified £90,000 by registering voluntarily for VAT.
If you decide to let your property for residential use outside of the tourist season, the income you receive will be VAT exempt. But you should still meet the above criteria for this to be the case.
Furnished Holiday Let VAT: Key Considerations
HMRC will only define your home as a furnished holiday let if the following applies:
- Your holiday cottage should be fully furnished and have all the usual appliances you would expect in normal occupation, for your guests’ use.
- Your property should be made available to book for holidays for at least 210 days each year.
- So, anyone staying in your property should stay no longer than 31 days and should not amount to more than 155 days in any one year.
- Your property should be let out and at least 105 days in any one year.
If you’re letting your holiday home as an FHL there are specific tax rules which apply:
- Any profits will count as part of your earnings for pension purposes
- You will be able to claim Capital Gains Tax relief for traders; you’re entitled to allowances for furniture, fixtures and equipment under ‘plant and machinery capital allowances’
VAT on Holiday Rentals and Income
VAT is applied to income generated from holiday rentals and letting your holiday home is considered a trade. It’s worth considering the VAT treatment of the income. Unlike residential letting, the FHL income follows the same VAT treatment as other accommodation providers: B&B’s, hotels etc., so your holiday home is subject to VAT at the standard 20%. Explain how VAT is applied to income generated from holiday rentals.
How to Register Your Furnished Holiday Home For VAT
Visit HMRC’s website and register for VAT but it’s a good idea to speak with a tax professional before doing so. You’ll see that you have the option of registering for VAT and either pay VAT at 20% or choose the Flat Rate Scheme as an option. Guide owners on how they can reclaim VAT on expenses related to their holiday let.
What is the Flat Rate Scheme?
The Flat Rate Scheme is a simpler option, it’s calculated as a percentage of your gross turnover. For example: if you pay VAT on Finest Stays commission, you would 10.5% rather than paying 20%
The Flat Rate Scheme is calculated at a lower percentage of your income received from letting your holiday home. This simpler calculation is a fixed percentage of your gross turnover but you will not be able to claw back the VAT on purchases (with the exception of capital expenditure which amounts to more than £2,000).
Furnished holiday lets currently have a flat rate of 10.5%. As an incentive, if you register for the Flat Rate Scheme you currently get a 1% discount during your first year as a VAT-registered business. It’s worth noting that this scheme applies to businesses with a turnover of £150,000 or less per annum. (A gross figure of £167,598 on a flat rate of 10.5%.) We recommend reading HMRC’s guide to the Flat Rate Scheme for further information.
Reclaiming VAT on Holiday Lets
Once VAT registered, you can claim back VAT on the business costs for your holiday home. This doesn’t include personal expenses but many services and goods include a 20% VAT levy which can be claimed back through your HMRC tax return.
For example: If you need to purchase new sofas for your holiday home, you can claim back the VAT. You can even claim it for cleaning products or anything used for the maintenance of your holiday let.
Please note – if you register for the Flat Rate Scheme you can’t claim back the VAT.
Understanding the Holiday Let VAT Threshold
If you have a turnover on your furnished holiday let of in excess of £90,000, you’re required to register for VAT which would apply to all income generated by your holiday let. If you have other businesses (unless they’re limited companies) the combined income of all your business will be subject to VAT.
When considering the VAT it’s important to remember that the threshold for tax is taken over a 12 month period rather than a tax or calendar year. When letting your holiday home, a deposit is taken and the balance paid before the guests come to stay at your holiday home. As far as HMRC are concerned, the deposit and balance payment are two separate transactions so the VAT should be declared on each payment, rather than on the total amount for that booking. So as an example: when Finest Stays receives the deposit for your booking, this is the date of receipt of payment which you need to use in your VAT return to HMRC..
As the owner of a furnished holiday let you can claim back the VAT on purchases and services related to your business. This is worthwhile especially if you’re investing in the renovation of your property. It’s possible to backdate purchases and VAT expenses if you have the relevant invoices for up to four years previous.
Compliance with VAT Regulations
At Finest Stays we do our utmost to support you in staying compliant so that you avoid the common pitfalls. Here are a few pointers to ensure that your business is efficient and successful:
- Firstly, assess whether or not your business needs to be registered for VAT. As discussed above, this depends on the taxable turnover.
- Once registered, you will need to calculate the total amount of VAT rentals and the total amount of VAT paid on purchases for the year. Gather all information and keep records.
- Prepare your documents before logging on to HMRC – have your bank details, proof of activities and receipts to hand together with relevant dates.
- Ensure your records are accurate; keep invoices with VAT amounts for all transactions, including services so that you can claim back the VAT.
- Use an accounting software to enable you to keep accurate records of all transactions and calculate VAT.
- Check your VAT records to ensure they’re all up to date and recorded correctly.
- It’s essential that you’re able to calculate VAT on your rental income.
- Be prompt when filing returns; these need to be done either quarterly or annually.
- Please ensure that you submit and pay your VAT by the deadline to avoid costly penalties.
The team here at Finest Stays are on hand to offer personalised advice and assistance with letting your holiday home. To discuss any concerns, you may have about the figures relating to your holiday let and advise in all aspects of holiday home lettings. Our aim is to ensure that letting your holiday home is a straightforward and beneficial process.
To discuss any concerns you may have, issue you with the figures relating to your holiday let and advise in all aspects of holiday home ownership. Our aim is to ensure that your management of VAT is a straightforward and beneficial process.
Please get in touch if you would like a consultation consultation to discuss listing your property with Finest Stays and any VAT concerns.
Further information and guidelines on VAT for furnished holiday lets at HMRC.
