The recent Airbnb era has resulted in more property owners letting their premises out on a short-term basis. The returns can be lucrative; however, the nature of short-term lets can incur unforeseen expenses.
In this article, we will explore how some of these costs may be mitigated, different methods for managing property and the associated tax implications.
Passive income
You may wish to rent out your own home via Airbnb for part of the year to earn additional income. Perhaps while on holiday or in between moving homes when the property is on the market.
Renting property falls within the realms of taxable income and it must be declared to HMRC. However, there is an allowance of £1,000 for rental income. Therefore, you can earn up to £1,000 before having to declare your property income to HMRC.
This allowance can also be used against other income that you may receive from your home e.g. renting out your driveway.
If you are renting out a room in your own home (while still living there), you may qualify for ‘rent-a-room’ relief. This allows you to earn £7,500 completely tax free. This only applies if you have a lodger living with you rather than letting out the whole property to a third party.
As specialist property accountants, we often get asked: “can i make money on Airbnb without owning property?”. The short answer is, yes!
Providing serviced-accommodation
Supplying serviced-accommodation has increased substantially in recent years. The relaxing of planning rules to allow offices to be converted into flats has also contributed in a rise in serviced-accommodation providers.
As property networks and entrepreneurs across the country share how they make money from property, there has been an increase in the ‘rent-to-rent’ sector.
This is an arrangement whereby a ‘rent-to-renter’ agrees to rent a property from a landlord. The ‘rent-to-renter’ guarantees rent equal to what the landlord would normally receive on an assured short-hold tenancy (AST) contract.
The rent-to-renter may choose to make some minor modifications to the property. This will enable them to rent each room out separately. For example, as a house in multiple occupation (HMO) to earn a greater return.
To let a compliant HMO, there are specific rules a landlord must adhere to and compliance measures they need to meet to secure their HMO licence and ensure the safety of tenants. These include: smoke alarms, minimum room sizes, specific safety requirements and a license is also needed.
Click here to learn more about the Government’s HMO requirements.
However, rent-to-renting requires more management. Nevertheless, the rent-to-renter accepts the administrative burden in order to earn a profit without having to own the property.
As a business activity, it is fairly low risk and minimal investment is needed. Some landlords in a saturated market may struggle to let their properties; therefore, this type of offer from a rent-to-renter may seem lucrative.
Similarly, properties can be converted into short-term accommodation by rent-to-renters and offered on the market as serviced-accommodation. Again, this can attract much higher income than a normal tenancy. However, as mentioned above, management is more onerous and occupancy levels will fluctuate.
How does serviced accommodation differ from a VAT perspective?
The main difference in the provision of serviced-accommodation compared with renting a property on an AST is that the supply of serviced-accommodation is considered taxable from a VAT perspective.
If you are providing serviced-accommodation and your income exceeds the VAT threshold (currently £90,000), then you must register for VAT and start charging VAT on your serviced-accommodation room rates.
Is VAT a problem?
If you need to add 20% to your room rates, you will become much more expensive. If your guests are mainly individuals, then the VAT will be a greater cost to them because they cannot claim it back.
However, there is a way to soften the blow if you are required to register for VAT.
The TOMS scheme
TOMS stands for ‘Tour Operators Margin Scheme’.
TOMS was designed to simplify the VAT accounting process for tour operators. It works by allowing businesses to account for VAT on the margin between the cost of buying accommodation services and the price they sell them for. This contrasts with the standard VAT accounting method, where VAT is calculated on the full selling price of the service.
What does this have to do with serviced-accommodation?
It is less well known that TOMS can apply to any business which buys and resells accommodation. This is exactly what happens in a rent-to-rent arrangement – accommodation is bought from the landlord and ‘resold’ at a profit to the end user.
How is this beneficial?
Ordinarily, you would total the amount of VAT collected on your sales and deduct any VAT from your purchases to calculate your VAT liability.
In a rent-to-rent arrangement, your largest cost is the rent paid to the landlord. However, residential property is classed as ‘exempt’ from a VAT perspective.
Therefore, there would be no VAT to reclaim on the rent paid to the landlord. This would put you in a significant cash flow disadvantage as you would need to pay all the VAT collected from your guests to HMRC.
However, TOMS provides a unique advantage…
TOMS allows you to pay VAT on the margin you make on your sales, rather than on the whole amount. This can be a significant benefit, as it reduces the amount of VAT that rent-to-renters must pay.
The key benefits of TOMS include:
- Improved cash flow. Rent-to-renters can save a significant amount of VAT by using the TOMS VAT scheme. This is because they only have to pay VAT on the margin they make on their sales, rather than on the full selling price.
- Competitive advantage. Rent-to-renters who use the TOMS VAT scheme can be more competitive than those who do not use the scheme. This is because they can offer their customers lower prices.
Do I need an accountant for my serviced-accommodation business?
TOMS is a complex scheme, and it is important for rent-to-renters to seek professional advice to ensure that they are taking advantage of it correctly. The benefits of TOMS can be significant for rent-to-renters. It is a scheme that many VAT registered serviced-accommodation businesses should consider using.
At Taxsure, we are here to help you navigate the complexities of your serviced-accommodation business. Having a property expert by your side is crucial in the ever evolving world of taxation. Click here to get in touch with our specialist property accountants today.
In conclusion
Many entrepreneurs are taking advantage of the low-risk, high-reward serviced-accommodation sector. Despite coming with its own accounting challenges, the short-let accommodation industry is growing rapidly across the UK.