VAT and Holiday Accommodation

Letting holiday accommodation to guests is generally VAT-able, so if the person is VAT registered, VAT at 20%is due on this income - equivalent to1/6th of the gross charge made to the guest. If an agent takes a commission, the owner cannot reduce its takings by the commission, but can claimany VAT charged on the commission as input tax. The gross price for the accommodation, not the money you receive, counts toward the VAT registration threshold.

Things get interesting. Let’s use a sour example a VAT registered farming partnership (“Mum & Dad”) which owns a farm. Their adult child, (“Sam”)lets out a surplus farm cottage for holiday accommodation. Sam’s turnover is below the VAT registration threshold.

Clearly, if the letting income was received directly by the partnership, VAT would be due on the income. It is important that the paperwork and structuring reflects that it is Sam operating the holiday let business. For example, there needs to be a proper lease or license between Mum & Dad and Sam and the letting “paperwork” with guests needs to be in Sam’s name.

If Sam is not VAT registered, Sam cannot recover VAT on any refurbishment works or the purchase of the linen and furniture, etc. The partnership cannot automatically reclaim the VAT on Sam’s costs either.

Whether Mum & Dad need to charge VAT on the rent to Sam is moderately complex. Conventional wisdom is that if Mum & Dad lease the cottage for a fixed periodic rent, without specifying that it must be used for holiday accommodation, assuming there are no planning or other restrictions on occupancy or use, and it is Sam that takes the risk/reward of running the holiday accommodation, Mum & Dad don’t have to charge VAT.

Under normal VAT accounting, Sam must charge VAT on the full value of holiday accommodation but can reclaim VAT on relevant costs. However, there is a case going through the Courts whereby a company in Sam’s position has only accounted for VAT on the Margin, after deducting (1) the rent paid to the landlord; (2) other direct costs such as cleaning, maintenance etc.

The company – Sonder Europe Limited - successfully argued that it was required to account for VAT under what is called the Tour Operators Margin Scheme (“TOMS”).

Sonder’s case is that TOMS applies to its fact pattern because it buys in accommodation and resells it “without material alteration” to a consumer. HMRC says not and has appealed its loss. HMRC’s Appeal is due to be heard in December 2024.

Under TOMS, by the way, Sam would not be able to reclaim VAT on the direct costs, including the rent, so if Mum & Dad do not need to add VAT to the rent, this will increase Sam’s profit margin.

Sam needs to consider this carefully, given that it is probable that HMRC will continue to contest the use of TOMS through the Courts. It may be some years before the dust finally settles and the correct VAT treatment becomes clear.

Sam needs to consider whether the way in which the business operates means it can be argued that TOMS applies. If so: -

1. Sam needs to work out whether TOMS will produce a significant saving. Sam will need to identify the direct costs associated with the accommodation services, including rent, cleaning, maintenance, and other relevant expenses.
2. Can Sam argue that the business does not need to register, given that under TOMS only the profit margin is counted when looking at the VAT registration threshold?
3. If VAT registered, Sam needs to decide whether to account for VAT on the full selling price, but submit protective claims arguing TOMS applies, or account for VAT under TOMS from the start.

We would be happy to discuss the options with affected businesses.