Serviced Accommodation/Furnished Holiday Lets (FHL) are currently enjoying special rates of VAT
The government made an announcement on 8 July 2020 allowing VAT registered businesses to apply a temporary 5% reduced rate of VAT to certain supplies relating to:
- hotel and holiday accommodation
- admissions to certain attractions
The temporary reduced rate will apply to supplies that are made between 15 July 2020 and 31 March 2021.
These changes are being brought in as an urgent response to the coronavirus (COVID-19) pandemic to support businesses severely affected by forced closures and social distancing measures.
That rate is set to change to a new rate of 12.5% from 1 October 2021 to 31 March 2022
What is the Flat Rate scheme?
The Flat Rate Scheme is designed to simplify VAT because the Flat Rate % is applied to your turnover including VAT.
It doesn’t change the VAT rate charged to the client it just helps to calculate the VAT to be paid to HMRC.
You can join the Flat Rate Scheme if:
- you’re a VAT-registered business
- you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months
- you get a 1% discount on the flat rate if you’re in your first year as a VAT-registered business.
You must leave the scheme if:
- you’re no longer eligible to be in it
- on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months
- you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)
What are the Flat Rates?
|Hotel or accommodation before 15 July 2020||10.5|
|Hotel or accommodation from 15 July 2020 to 30 September 2021||0|
|Hotel or accommodation from 1 October 2021 to 31 March 2022||5.5|
Why would Flat Rate VAT help?
Example You bill a client for £1,200 including VAT, so thats £1,000 plus 20% VAT.
You’re a Holiday Let, so the VAT flat rate for your business is 0%.
Your flat rate payment will be 0% of £1,200, so nothing to pay
This is great news for Furnished Holiday Lets especially if they are just crossing the £85,000 VAT Threshold
Most Holiday Lets can’t increase their prices to incorporate VAT when they cross the VAT threshold because they would be uncompetitive so VAT is direct hit to their profits.
On the basis that the accommodation fee is unchanged but now includes a VAT element, if Flat Rate is used and the rate is 0% then no VAT is paid to HMRC.
That may not work for every business, it depends on whether you have a high level of VAT expenses which would offset the VAT and could result in a refund for example when you first register you may be able to reclaim VAT on pre-registration costs. Flat Rate restricts the recovery of expenses, you cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000
Its also a problem if you’re classed as a ‘limited cost business’ if your goods cost less than either:
- 2% of your turnover
- £1,000 a year (if your costs are more than 2%)
This means you pay a higher flat rate of 16.5%.