I’ve been out and about talking to a lot of property developers and investors recently. I’ve been told that the “hot” subject in property (and presumably where the money is) is in serviced accommodation, so I’ve been thinking about how it fits into the world of VAT and how the VAT rules apply to serviced property. And, as I’ve explained below, it’s a very messy and complicated subject.
For VAT purposes, the provision of serviced accommodation, whether in a flat, house or some form of HMO, is usually regarded as similar to hotel accommodation. This means that the rent is liable to VAT at 20%, unless the stay extends beyond 28 consecutive days in which case VAT exemption applies.
The way that the VAT rules work is that if your income is “taxable”; i.e. liable to VAT at 20%, 5% or the zero-rate (NOT EXEMPT!), then you can claim VAT on your costs. So if your serviced accommodation is let for periods up to 28 days, you charge VAT on the income and you can claim VAT on the costs.
This all sounds simple enough, but like most property stuff, the VAT issues are, potentially, much more complicated. For all intents and purposes, most property that is used as “serviced accommodation” is, in fact, residential property for VAT purposes. This includes dwellings, such as flats and houses, and HMOs.
So what does this mean for VAT purposes? Well here are some of the key issues:
- Building a new property for serviced accommodation may qualify for the zero-rate if the building qualifies as a new residential property as explained in HMRC VAT Notice 708: Buildings and construction http://tinyurl.com/mod94mc. in which case the reduced rate of 5% may apply.
- Converting or renovating a property for serviced accommodation is liable to 20% VAT unless the work qualifies for the specific VAT reliefs explained in HMRC VAT Notice 708, in which case the reduced rate of 5% may apply.
- That means that your property has to meet a whole load of specific criteria, e.g. there should be no restrictions on how the property can be used, such as restrictions on full time occupancy.
- If your income is a mix of short term rental (i.e. up to 28 days) and exempt (over 28 consecutive days), then your income is “partly exempt” and you can only claim VAT on those costs that relate to the short term/taxable rentals.
- Letting or selling an entire property that has been built or converted for use as serviced accommodation is normally VAT exempt, which means that you can’t claim VAT on your costs. This is important because you might decide to buy and convert a property in one company, but then transfer the ownership into an associated company which operates the serviced accommodation business. This area on its own is a minefield.
These are just some of the main VAT issues that apply to serviced accommodation. It is, pretty much, a very specialist subject within the already specialist and difficult subject of VAT and property development. Please take specialist advice if you’re planning any such investments or developments.