While residential property is VAT exempt, Serviced Accommodation income is not, because it is a form of business income. This means that once you hit the VAT threshold (currently £85k turnover per annum), you need to start charging VAT on your bookings.
Here are 3 main strategies that when used carefully and with proper planning, can legitimately reduce your VAT bill:
Flat Rate Scheme
Calculating the VAT you pay is easy – you deduct the VAT you paid on purchases, from the VAT you received from customers.
However for smaller businesses this can increase paperwork and costs, and in 2002 the government proposed a simple alternative.
Rather than making this calculation, businesses can instead choose to pay a set percentage of their total income to HMRC as their VAT contribution.
This set percentage varies from industry to industry, and is based on industry averages so as to work out roughly the same amount.
The percentage for “Hotel or Accommodation” is 10.5%, with an additional 1% discount for your first year on the scheme.
As serviced accommodation operators, we are much less likely to have a large amount of VAT taxable supplies when compared to hotels. This means that serviced accommodation operators tend to pay less VAT if they sign up to the Flat Rate scheme.
As you are paying a set percentage of your profit as VAT, you’re unable to reclaim VAT for most of your supplies. There are however two main exceptions to this:
1 – when using the flat rate scheme you are still able to reclaim VAT on supplies from before you became VAT registered. You can go back and claim VAT from any taxable services invoiced in the 6 months prior to your date of registration. With goods, you can go as far back as 4 years so long as the goods are still owned and used within the business.
2- You can reclaim any “capital goods” for example, goods that you use within your business if the invoice total is more than £2,000. Individual items can be less, but as long as the total of capital goods on the invoice is more than £2,000 then you can claim back VAT.
The Flat Rate scheme was designed for small businesses, there’s an “upper limit” of £230,000 including VAT.
Long Stay Bookings
VAT is charged at the usual rate for 28 days of the stay, afterwards there is no VAT on the accommodation. For long stays, this can greatly reduce the amount of VAT.
We must decide what proportion of our rate is for accommodation, and what proportion is for service (cleaning and bed sheets). HMRC advise you must give at least 20% your rate to services, so this is the sensible figure to go on.
Probably the easiest way to reduce your VAT bill is to look at alternative SA models.
For example, guaranteed rent deals the income will be in your name, but for joint ventures and the income is usually in the name of the landlord.
You then invoice the landlord for your services, a percentage of the profit in a joint venture.
As a result, their VAT status and not yours applies to the income from the property.
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