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Artificial Separation - Don't get caught out!

The income from Furnished holiday lettings is normally chargeable to VAT at 20%, however this should not be an issue unless you have other income (that would be liable to VAT), resulting in your gross income exceeding £79,000 which is the current VAT turnover registration threshold.

For example if you and your spouse were in a VAT registered business partnership (e.g. farming in partnership) and also owned and operated a furnished holiday letting business jointly, you would have to account for VAT on the holiday letting income but you would be able to reclaim any VAT on expenses incurred.

If however, you were a farming partnership (registered for VAT) and you operated the holiday letting business as a sole trade then the furnished holiday letting income is received in a different capacity, meaning VAT should not be an issue.

However, watch out for a VAT inspection, in the above example, HMRC could argue that the businesses have been artificially separated to save ‘having to charge VAT on the holiday letting income’.  This could be bad news, resulting in backdated VAT, interest and potentially penalties being charged.

If you are not registered for VAT and your supplies including the holiday letting income exceeds the VAT registration threshold (currently £79,000) in any 12 month period, then you would need to register for VAT and charge VAT at 20% on your holiday rentals.

VAT is only part of the jigsaw! Remember that the other taxes, particularly Inheritance tax, capital gains tax and income tax must be considered as part of the whole picture. If you have any queries or if you would like a no-obligation, free of charge meeting, please get in touch with Simon Tapp at Moore Scarrott Chartered Accountants on 01823 282100.