VAT affects holiday let finances in ways many owners don’t expect.
This guide explains how VAT works for holiday rentals, helping you make informed decisions about your property business.
We’ll cover:
- When to register for VAT
- How VAT changes your pricing
- Claiming VAT on expenses
- Keeping proper VAT records
Whether you’re just getting involved with holiday letting or have an established portfolio, this guide provides useful insights into VAT and how you can master it to protect returns.
When VAT Becomes Relevant to Holiday Lets
Holiday lets are subject to VAT rules. This is because HMRC views holiday lets as a commercial trading activity, similar to hotels or bed and breakfasts.
VAT registration is mandatory when your total business turnover from all VATable activities reaches £90,000 in any rolling 12-month period. For holiday lets, this turnover includes:
- Your basic rental income
- Additional charges such as cleaning fees, pet supplements, or damage deposits
- Any goods you sell related to the let, like welcome hampers or local produce
Importantly, if you have other VAT-taxable business activities, their turnover also counts towards this £90,000 threshold.
For example, if you run a self-employed side hustle business alongside your holiday let, you need to combine the income from both when considering VAT registration.
Monitor your total business income closely as you approach this threshold. Once you hit £90,000, you have 30 days to register with HMRC. Failing to register on time can lead to penalties and back-dated VAT charges.
Charging VAT on Your Bookings
When you become VAT-registered, you’ll start adding VAT to your prices. This is because you’re now collecting VAT on behalf of HMRC. As such, your prices will have to increase to maintain the same profits.
Here’s why:
- If your current nightly rate is £100, you’ll need to charge £120 to your guests
- £100 of this is your actual rate, and £20 is the VAT you’ll pass on to HMRC
- Your income remains £100, but your guests are now paying £120
This 20% increase can impact your competitiveness, especially against non-VAT registered properties. You might need to adjust your strategy:
- Review your pricing structure, possibly absorbing some VAT yourself
- Enhance your property or offerings to justify the higher price
- Consider seasonal pricing to balance the VAT impact
Remember, VAT applies to all charges related to the stay, including extras like food, drink, or cleaning fees.
Reclaiming VAT on Your Expenses
Is VAT all doom and gloom? Not at all.
When you’re VAT-registered, one of the major perks is the ability to reclaim VAT on certain business expenses.
When you charge VAT to your customers, you essentially act as a middleman between the customer and the government, collecting VAT on the government’s behalf.
However, the government understands that businesses also incur VAT costs when making purchases, especially those that help them operate or grow.
To avoid double taxing, VAT-registered businesses can reclaim the VAT they’ve paid on qualifying business-related expenses.
This can include:
- Furniture, appliances, and soft furnishings for the property
- Repairs, maintenance, and improvement costs
- Utility bills for the let periods
- Cleaning and laundry services
- Marketing and advertising costs
- Accountancy and legal fees related to the business
It might be quite a confusing concept, but the reason you get to reclaim VAT is because the government doesn’t want businesses to be unfairly taxed twice.
When you buy goods or services for your business, you pay VAT just like any other customer.
However, since you’re collecting VAT from your customers on behalf of the government, it’s only fair that you get back the VAT you’ve paid on your own business expenses. Essentially, you’re not meant to be out of pocket for the VAT that helps your business function!
To reclaim VAT, you’ll need valid VAT invoices for all your expenses. A simple receipt isn’t sufficient – ensure your suppliers know you’re VAT-registered and provide proper VAT invoices.
The Flat Rate Scheme: A Viable Alternative?
VAT introduces some accounting headaches.
To help, HMRC offers the Flat Rate Scheme as a simplified option for small businesses. Instead of calculating VAT on every transaction, you pay a fixed percentage of your turnover as VAT. For holiday lets, this rate is currently 10.5%.
Here’s how it works:
- You still charge the standard 20% VAT to your guests
- Instead of reclaiming VAT on purchases, you pay HMRC 10.5% of your gross turnover
- You can’t reclaim VAT on most of your purchases under this scheme, except for certain capital assets over £2,000
The Flat Rate Scheme can be simpler to manage, but it’s not always the most cost-effective option. It tends to benefit businesses with low amounts of VATable purchases.
You may need to seek out specialist VAT accounting advice to discern whether it’s good value for you.
Wrapping Up
VAT rules for holiday lets are complex, but understanding them puts you in control of your business finances.
Professional help can be an asset in accounting for VAT, ensuring reclaims, and deciding whether the Flat Rate Scheme is for you.
At Double Point, we help holiday let owners tackle VAT head-on.
We’ll examine your specific situation, recommend the best VAT scheme, and ensure you claim everything you’re entitled to.
Contact us to get started. We’ll show you how to turn VAT knowledge into better profits for your property.
