Letting of residential accommodation is generally an exempt supply for VAT purposes. However this exemption does not apply to holiday accommodation (includes furnished and non-furnished holiday lettings). The definition of ‘holiday accommodation’ for these purposes includes property that is advertised or held out as holiday accommodation and those considered suitable for holiday or leisure use. It is not restricted to periods of letting or availability.
Supplies of holiday accommodation are therefore taxable supplies and should be standard-rated, which means that if the rental income goes above the VAT registration threshold (currently £85,000 per year), the landlord will have to register for VAT and collect VAT from the tenants.
Care is needed when applying the rules as there are exceptions – for example, for longer stays. A UK property let to visitors under an Airbnb (or similar) arrangement should generally qualify as holiday accommodation, but care should be taken.
Registering for VAT
VAT applies once the property provider has VAT registered, which is compulsory where their taxable turnover for 12 months exceeds the current £85,000 threshold.
There are separate rules for ‘non-established’ providers of VATable supplies (i.e. providers based outside the UK), where a zero registration threshold applies. Those in such a position will need to consider their obligations and responsibilities carefully.
It is possible to voluntarily register for VAT before reaching the turnover threshold. This may be beneficial to those seeking to recover VAT. However, the cost-benefit analysis of price increases should be measured against VAT recovery potential before making a voluntary registration application. By not charging VAT, the property provider has a competitive advantage over hotel chains, but in the case of well situated city properties, adding VAT may not be overly disadvantageous for bookings.
VAT registration applies to the provider, i.e. the owner of the property. In the case of an individual, this VAT registration will render not just their property income, but all potentially taxable income subject to VAT, which could be onerous. By the same token, all such personal income counts towards the VAT registration threshold, so starting to let out a property could tip an individual over the VAT registration threshold.
For larger Airbnb type operations, involving multiple properties, it may be preferable (for VAT) to own the properties in a separate entity such as a company or even a partnership. Multiple tax and legal considerations apply to transferring property ownership, but for VAT registration purposes at least, a partnership route might be a more viable option than transferring the properties to a separate corporate entity.
A simple decision to generate additional income from an existing asset may not always be the straightforward option it appears. Sensible up-front structuring and advice can mitigate potential downsides.