Charging VAT on Rent? What You Need to Know

Should You Be Charging VAT on Rent? 

If you're a landlord, you might be scratching your head wondering if you should be charging VAT on your rental income. Whether you're renting out residential properties, holiday homes like Airbnb, or commercial spaces, the question of VAT is quite confusing.

Here's the deal: there isn't a one-size-fits-all VAT rule for rental income. Depending on the type of rental and your specific circumstances, you might find yourself either exempt from VAT or required to charge it. With millions of rental properties in the UK, it's essential to get a clear picture of what applies to you.

A Quick Guide to VAT

Value Added Tax, is an additional tax applied to many goods and services in the UK. While it's common knowledge that VAT adds a bit to the price of everyday items, business owners and landlords need to understand the nuances of how it works.

When a business hits the VAT registration threshold, it must sign up for VAT with HM Revenue & Customs (HMRC). If your business is below this threshold, you can still choose to register voluntarily. Once registered, you'll need to manage VAT collection, file returns, and handle VAT payments.

VAT rates vary depending on your business activities:

Standard Rate (currently 20%)
Reduced Rate (currently 5%)
Zero Rate (0%)

Some items are also VAT exempt.

VAT Exemptions: What Does That Mean?

When it comes to renting, the general rule is that selling, renting, or leasing property is VAT exempt. However, there are exceptions to this rule. Being VAT exempt can have its perks, but it also comes with some downsides.

For landlords, being VAT exempt means that the rent you charge doesn't include VAT, which could make your properties more attractive to potential tenants. On the flip side, you can't reclaim VAT on your business expenses, which might lead some landlords to opt to charge VAT. Let's break this down with a look at residential rentals first.

Charging VAT on Residential Property Rent

In most cases, residential property rent is VAT exempt. This typically involves a straightforward rental agreement between landlord and tenant, often managed by a letting agency or specialist. If you don't run any other business, you can't register for VAT, so you don't add VAT to rent payments.

But can you still recover VAT on expenses related to your residential rental property? It's possible. Buy-to-let landlords may be able to reclaim VAT on certain costs, such as property renovations.

Recovering VAT as a Residential Landlord

To recover VAT, you must also run another VAT-registered business. This way, both businesses share the same VAT registration, allowing you to reclaim VAT on certain expenses and refurbishments under HMRC's VAT de minimis rule.

Navigating VAT recovery for buy-to-let properties can be tricky, so if you're unsure, consider consulting an accountant.  I might be able to recover amount of VAT depending on circumstances.

VAT on Holiday Lettings: What's the Deal?

Holiday lettings present another layer of complexity. Hotel rentals are generally subject to VAT, and holiday lets sit between residential properties and hotels. The VAT rules can vary depending on whether the property is owned by a business, partnership, or sole trader.

Typically, holiday lets should charge VAT, similar to hotels. However, if your turnover is below the VAT threshold of £85,000 per year, you're not required to add VAT to your rates.

On the other hand, if your holiday let's turnover exceeds this threshold, you'll need to register for VAT and charge it. While this might increase rental rates, it also allows you to reclaim VAT on property-related expenses. Holiday lets are subject to the standard 20% VAT rate.

Common VAT-inclusive expenses for holiday lettings include:

Cleaning services
Laundry services
Catering
Certain transportation costs

What to do next

If you're feeling lost or overwhelmed by the VAT rules for your residential or holiday lets, it's wise to reach out to a professional accountant. AWS Accountants can provide clarity and help ensure you're managing VAT correctly.