Holiday lets, the reduced rate of VAT and booking agents

The temporary reduced rate of VAT for supplies of holiday accommodation will increase from 5% to 12.5% on 1 October 2021. Even if a holiday is taken after 1 October the 5% can still be applied if a tax point is created beforehand. Receipt of payment or issuing a VAT invoice both create tax points, so if a payment is received in September 2021 the 5% reduced rate will still apply to that payment, but not to a balancing payment received after 30 September. Encouraging holidaymakers to pay early, possibly by offering a small discount could be of mutual benefit.

As an example if £1,000 was received after 1 October, while the VAT rate is 12.5%, a business would pay VAT of £111.11 to HMRC and retain £888.88 itself. If a 5% discount was offered on payments made before 1 October the VAT payable on £950 would be £45.23 meaning a business would retain £904.77. Not only is more money retained but payment is received early. The saving is even greater if the payment was due to be made and the holiday taken after 31 March 2022 when the VAT rate is due to be back at 20%.

Issuing a VAT invoice for the whole holiday value before 1 October 2021 would fix the VAT rate at 5% for the entire price invoiced. However the VAT value invoiced would have to be paid based on the invoice date, regardless of whether payment had been received, and there would be additional administration so this may be a less attractive option.

It is also worth remembering if a deposit was paid before 15 July 2020, and VAT was paid to HMRC at 20%, but the holiday takes place when a lower rate of VAT is in force the VAT paid can be adjusted to the lower rate. If a VAT invoice is issued showing VAT at 20% a credit note will be issued. It is not too late to make an adjustment if you have not already done so.

Where booking agents are used receipt of payment by the agent is usually treated as receipt of payment by the property owner. This means receipt by the agent is the important date for determining when whether a payment has been received when the 5%, 12.5% or 20% VAT rates apply.

Property owners should also be accounting for VAT when payments are received by their agent. This is the case even if the property owner accounts for VAT on a Cash Accounting basis. The HMRC Cash Accounting Notice includes a paragraph, that has the force of law, which states “If an agent collects payments on your behalf, you must account for VAT on the supply in the VAT period in which your agent collects payment from your customer”.

If the booking agent collects payments under a stakeholder arrangement where they hold the payment temporarily this may not create a tax point. In general we would not expect booking agents to be acting as stakeholders.

Many holiday letting businesses have an income from holiday lettings which are below the VAT registration limit, currently £85,000, so are not VAT registered.

What is not widely appreciated is that if a UK business receives certain services from businesses based overseas, with no UK VAT registration, the value of these overseas services has to be added to the turnover of the UK business when deciding if the UK business has to register for VAT. This is called the reverse charge mechanism and the services covered include advertising and booking services.

One large overseas booking agent charges a commission of 15% which means if a business received holiday bookings of £80,000 through that agent the commission would be £12,000 and the aggregate of £92,000 would be well over the VAT registration limit.

HMRC have obtained information from at least one overseas agent and we are aware of registration checks being undertaken on businesses who have a turnover from holiday lettings of under £85,000.

When using agents it is important to be clear in what capacity they are acting and the VAT implications this may have.