Over recent months, I’ve had more and more queries about VAT and serviced accommodation, asking whether it’s possible to reduce the VAT liability of the income by various means.
Unfortunately, it’s very difficult to do this. Serviced accommodation is regarded as “similar” to hotel accommodation, which is specifically excluded from VAT exemption in the VAT legislation. HMRC discusses the subject quite clearly in VAT Notice 709/3: Hotels, holiday accommodation and VAT section 2 http://tinyurl.com/nlsi. The only time that part of the income can be regarded as exempt is if the guest stays for over 28 consecutive days, in which case the business need only pay VAT on that part of the income that is for the “serviced” element and not for the use of the room/apartment etc.
One of the most common ideas is to split the rental income so that there is a separate supply of accommodation which is VAT exempt and a separate charge for the servicing element, e.g. for laundry, cleaning etc. Unfortunately this won’t work, particularly if both services are supplied by the same business. Arguably you could split of the activities between separate but associated businesses, but in practice it would probably be difficult to avoid the premise that this is artificial and would be VAT avoidance, particularly if the guest has no option other than to take the full range of services.
The only way it might be viable is if the accommodation and services were provided by separate but unassociated business, where the property owner rents a furnished room and the guest is offered the services by a third party who is not in anyway associated to the owner and the guest is free to take the services if required and, for example, could even obtain the services from a different provider. But such arrangements would have to be very carefully arranged and followed to avoid any suggestion that the property owner is making a single supply of serviced accommodation.
Can we use the Tour Operators Margin Scheme (TOMS) and just pay VAT on the margin?
Of course anything to do with hotel accommodation or similar brings up the issue of the TOMS, which allows the business to pay VAT only on their profit. This would apply if you were buying and selling the accommodation as principal, making no material changes to the services.
However most of the queries I receive are from investors who are looking to use their own property and add in the serviced element. In this scenario, the investors aren’t “buying in and selling on” because their supplies are “in-house”; i.e. they own the property and provide the services. So the TOMS doesn’t apply.
What about the Flat Rate Scheme?
If your turnover is below the FRS limit of £150,000 excluding VAT, then you may consider using the FRS. Under this arrangement, you don’t claim VAT on costs (other than certain “capital expenditure” of £2k or more) but you only pay VAT at 10.5% of your income. However, you can’t use the scheme if your business is associated with another business, as defined in VAT Notice 733, the Flat Rate Scheme, s3.8 http://tinyurl.com/yddfw8f3. And no, you can’t separate your operation into a number of different separately registered companies /partnerships etc because then neither business would be able to use the scheme because of being associated with each other.
But the FRS is a good way of saving some VAT if you are starting your first business and have no associated businesses.
What about keeping below the registration limit?
If your turnover is below the current registration limit of £85,000, then you may decide to remain unregistered. However, if the total income from this activity and any other associated business exceeds the VAT registration limit, then in many cases, HMRC can direct that the businesses should be treated as a single entity for VAT purposes and account for VAT on all income, even if avoiding VAT wasn’t a motive for keeping the businesses separate.
So what should you do?
I suppose that the way to think about it is to compare serviced accommodation to hotel or holiday accommodation. If your business is below the VAT registration limit, then you can remain unregistered. If your business is VAT registered and you’re not associated with any other businesses, then you can use the Flat Rate Scheme.
But otherwise, you’re in the same position as any other hotel operator, boarding house owner, provider of luxury serviced flats, holiday home business. Your business is liable to VAT. If you come across any arrangements that say otherwise, please let me know!