The challenges of VAT are ever present. A relatively simple idea such as renting out a property on a temporary basis to visitors would seem quite innocuous, but if the Rental turnover becomes significant it could lead to VAT registration and associated considerations.
The income from property that qualifies as UK holiday accommodation will be standard rated for VAT. This assumes that the property is not let out on a long term residential basis, but rather as short term, furnished sleeping accommodation, held out for visitors. Care is needed when applying the rules as there are exceptions (e.g. longer stays).
The typical example of a UK property let to visitors under an Airbnb (or similar) arrangement would probably qualify. There are some contractual issues to clarify in terms of billing; does the property owner supply to an organisation in return for a standard fee, or to the individuals that use the property? Understanding this can assist with invoicing and also VAT recovery on costs (e.g. admin costs, payment handling fees etc from the central organisation).
VAT applies once the property provider has VAT registered, which is compulsory where taxable turnover exceeds £85,000. However, there are separate rules for ‘non-established’ providers of VATable supplies where no registration threshold applies, following the decision in Schmelz, which concerned the rental of foreign-owned property. Those in such a position should consider their obligations carefully.
It is possible to register before breaching the £85,000 limit, on a voluntary basis, but the cost-benefit analysis of price increases should be measured against VAT recovery potential. 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 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 threshold.
For larger Airbnb type operations, involving multiple properties, it may therefore 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 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.
If you would like to discuss any of the issues raised here, please get in touch with Richard Collier or your usual contact at Mercer & Hole.