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bigduckontax
bigduckontax, Accountant
Category: Tax
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We have a holiday home in the UK which we let out for holiday

Customer Question

We have a holiday home in the UK which we let out for holiday lets. We started renting the property out on 25 April 2014. We have bookings until 3 January 2015 and our revenue up to that date is £73,000. When we take a booking we charge a 25% deposit immediately then the balance 55 days before the holiday. At what point do we start having to pay VAT?
We have bought lots of goods in the last year for the house ranging in price from £50 to £5000 which we paid VAT on.
Should we go on the cash accounting so we can reclaim that VAT then go to the flat rate scheme the following year so only charge 10.5% ( I think thats the correct rate)

Any way of avoiding VAt altogether?
Any other ways of mitigating the effect. It will a jump in the price we have to pay guests.

Regards

Alan
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello Alan, I'm Keith and happy to help you with your question.

Here is the HMRC directive [edited] on VAT registration. The key number is ***** annual turnover of 81K.

'If you're in business, you must register for VAT if your VAT taxable turnover for the previous 12 months is more than £81,000. This figure is known as the VAT registration threshold.

You must also register for VAT if you think your VAT taxable turnover may go over the threshold in the next 30 days alone.'

Once you have registered for VAT you can reclaim any input tax levied on purchases for your business. Conversely, you must raise your charges to cover the VAT you will have to pay to HMRC net amounts quarterly. This increased charge to customers might make your business un-competitive against your peers.

As for paying VAT you will have to issue VAT invoices to those booking accommodation and also account for VAT on all receipts as they occur. If you are on a cash accounting basis this means that you would have to strip out the 20% VAT on deposits and should the odd one be returned then one would deduct the refunded sum from the next incoming deposit. This stripped out 20% would form part of your output tax figure for your quarterly return.

The disadvantage of the Flat Rate Scheme is that you cannot reclaim input tax paid on goods and services for your business. Here again is HMRC advice:

'Who can join the Flat Rate Scheme

You can join the Flat Rate Scheme for VAT and so pay VAT as a flat rate percentage of your turnover if:

Your estimated VAT taxable turnover - excluding VAT - in the next year will be £150,000 or less. Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales or other supplies. It excludes the actual VAT that you charge, VAT exempt sales and sales of any capital assets.

Generally you don't reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2,000 - see the section in this guide on claiming back VAT on capital assets for the rules and restrictions.

Once you join the scheme you can stay in it until your total business income is more than £230,000.'

I cannot advise you as to whether the cash or flat rate would be more cost effective as I am not in possession of the relevant, and voluminous, data. It all depends upon the level of service bills needing to be paid to operate the business. To work this out some time with a wet towel round one's head and a copious supply of the backs of envelopes will be needed!

You can, of course, avoid all this palava if you keep your sales below the magic 81K limit. Otherwise VAT is a tax you simply can't avoid one way or the other. Always bear in mind Benjamin Franklin's dictum that in life there are but two certainties, death and taxes.

I do hope I have been able to help you with your problem. Some work is going to be needed to work everything out to decide which way the VAT cat should jump.
Customer: replied 3 years ago.

Thank you for the information. My thoughts were to go on the cash accounting as soon as we hit 81,000 and reclaim all the inputs so far (most of which will not be repeated ie beds) Then in the next tax year go to the flat rate . Does that sound feasible

Expert:  bigduckontax replied 3 years ago.
Yes it does, you can always go to HMRC for a reclaim of input tax for major repairs to the building etc as a special case and maybe have a ding dong every time over whether a new roof is such an item! Mark you on new roofs the tax situation is interesting. Our club room needed a new roof which the pundits say is capital expenditure. Our auditor, a long term PCW man, went to PCW's tax experts pro bono who were of the opinion that as we always had had a roof we were entitled to replace it out of revenue expenditure and the Inland Revenue, as it was then, never batted an eyelid!

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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.