Topping up business income with Airbnb rental and VAT?
You are registered for VAT as a sole trader and have decided to earn extra money by renting out a bedroom in your home via Airbnb. But is this income subject to VAT and, if so, is there a way around it? John Craig looks at this futher.
It is often forgotten that there is no such thing as a VAT-registered business, only a VAT registered person, i.e. a legal entity which might be a sole trader, partnership, limited company or charity, club or association. This means that a legal entity must account for output tax on all taxable sales it makes once it is registered for VAT.
In a nutshell, this means that multiple business activities operated by a single entity are covered by VAT registration.
EXAMPLE
John is a computer consultant and is registered for VAT. He also has two other sources of income, namely buying and selling gift items through eBay and refereeing local football matches.
John might be able to argue that output tax is not due on the refereeing fees because this is an activity he does for personal enjoyment, but which happens to involve some payment. VAT is only due on a supply of goods or services made “in the course or furtherance of any business carried on by him”. Output tax would definitely be payable on the gift item sales though.
It is unlikely that John will be able to add 20% VAT to the sale of his gift items if he is selling goods to the general public or other customers who cannot claim input tax without it affecting his turnover.
JRW ADVICE – It might be worth John creating a separate legal entity for this activity, perhaps a partnership with another family member.
ACCOMMODATION
Most supplies made in connection with land or property are exempt from VAT. This is good news because it means there is no output tax to pay on the income received, even if the individual is VAT registered. However, there are a number of exceptions in the legislation where land related income is always standard rated, e.g. car parking receipts, storage fees, room hire for wedding facilities and so forth.
An important exception relates to sleeping accommodation provided in a hotel, guest house or similar establishment. A challenge is to therefore consider the meaning of a “similar establishment” and whether this could mean that accommodation provided for temporary visitors in a private residence is subject to VAT.
The legislation includes a helpful note which defines a similar establishment as “Premises in which there is provided furnished sleeping accommodation, whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers”.
JRW ADVICE – Many property owners incorrectly think that their Airbnb (or similar) income is not subject to VAT because they do not provide food or drink to their guests. This is irrelevant; it is whether the accommodation is suitable for use by visitors or travellers and it is important to be aware of this fact.
DIFFERENT LEGAL ENTITY
You will not have a problem with your Airbnb income if it is earned through a different legal entity to your VAT-registered business, as suggested above for John with his gift item sales.
For example, if you are VAT registered as a sole trader but jointly own your residential property with another person, e.g. a friend or spouse, this income will be earned as a partnership, so VAT is no longer a problem.
JRW ADVICE – It is important that decisions made about VAT are consistent with other taxes. If income from jointly owned property is treated as a partnership for VAT purposes, it should also be treated in the same way on the individual self-assessment tax returns of the partners.
SEPARATION OF ACTIVITIES
If you split different business activities into separate legal entities, this should be carried out with proper planning in order to avoid a potential challenge by HMRC that there is actually only one business, and that output tax is payable on all income sources. Even if a split has been carried out properly (separate bank accounts, separate invoicing and expenditure etc.), HMRC has the power to treat the two entities as a single business from a current or future date if they are closely bound to one another by financial, economic and organisational links.
JRW ADVICE – Note that the key word in the legislation above is “and”, i.e. HMRC needs to prove that all three links apply in order to issue a direction to treat the two separated businesses as a single entity.
There are guidelines about what HMRC considers to be an economic, financial or organisational link. And there are a number of questions that a business owner should consider in each case, the following questions are relevant and can be applied in most cases to decide if a proper separation has taken place.
Economic links
• Are both businesses trying to realise the same economic objectives?
• Do the activities of one part of the business benefit the other?
• Are both businesses supplying the same circle of customers?
Organisational links
• Are there two separate legal entities?
• Are premises shared?
• Do both businesses have common management?
• Are there common employees?
Financial links
• Is financial support given by one part of the business to the other?
• Would they both be financially viable without support from one another?
• Is there a common financial interest in the proceeds of the business?
28-DAY RULE
If your Airbnb income is subject to VAT, i.e. there is no scope for a business split, there is a reduced output tax charge if the same guest stays for more than 28 days in a row. In such cases, a reduced value situation will apply, i.e. no VAT will be paid on up to 80% of the income received from the guest for the 29th and subsequent days of their stay.
JRW ADVICE – The 80% reduced charge does not mean that your client is earning exempt income with a potential input tax restriction under the rules of partial exemption. The income is still classed as taxable, i.e. they can claim input tax on their related costs.
SUMMARY
Short-term letting income such as from Airbnb will be standard-rated as it is being paid to the same VAT registered entity as the main business activity. However, it is possible to operate the letting activity through a separate entity, e.g. a partnership. Don’t forget to ensure the income tax treatment mirrors the VAT treatment.
