Introduction
It is important to recognise what might seem like a hobby, just recovering some costs or facilitating travel for others, will be seen as a business activity by the tax authorities. This article focuses on UK issues, but the same issues are likely to arise in other countries where the property being let is overseas.
Basic rules
The supply of hotel or similar accommodation is subject to VAT. If the registration threshold is exceeded, then a VAT registration is required. Some EU member states have no registration threshold. In the UK for 2023 the registration threshold is £85,000 – there are specific tests to determine if the registration requirement has been triggered.
The threshold is not based on profit, but on turnover. Importantly, and often overlooked, is that you need to consider services received from overseas, as they count towards the threshold – which will not be obvious to many, other than a VAT specialist.
Services received from overseas
The UK, as well as EU member states, have a reverse charge mechanism in place. This results in a requirement for the recipient of supplies received from overseas for their business purposes to step into the shoes of the supplier.
Example
(Holiday lets through a platform based outside the UK provided to a UK holiday letting provider to act as if they are the supplier). This means the accommodation provider has to include the platforms charge, in their deemed income when calculating if they are required to register for VAT.
If the accommodation provider is registered or registerable for VAT, then they have to account for VAT on the deemed supply by them (of the non UK platforms services) but can also recover this VAT subject to the normal rules.
Why does it matter?
The recognition of the reverse charge is a statutory requirement. It can easily trip businesses into a VAT registration obligation when they have tried to trade below the registration threshold. If there is a late registration, then only VAT is due for the period of the registration obligation, but it is highly likely a penalty will apply. There are also compliance costs to consider as VAT returns must be submitted using approved software, and there may be a requirement for specialist accounting support.
Other matters
It might be that the UK authorities consider this matter in the future, as there is a VAT loss to the UK Treasury by the platform provider being based overseas. This means that VAT on any commission is avoided by the platform provider. This does not feel correct if we take a holistic view of the tax system – tax should be accounted for somewhere.
Summary
If you are looking to generate additional income from the exploitation of a property, then there are inevitably tax considerations. You should consider all taxes, as it is very likely there will be tax risks created. In the UK the underlying requirement in respect of penalties and their application is the evidence of the exercise of reasonable care.
In respect of VAT, it is critical you consider the registration threshold (nil in some EU territories). You must consider services received from overseas as they count towards the VAT registration threshold.
The next step
Please contact Sean Glancy or our usual UHY advisor if you have any questions regarding this insight.
