VAT on Holiday and Commercial Lettings

The letting of holiday accommodation is always standard rated if the turnover of the business is such that the VAT registration threshold has been exceeded.

There are set rules for determining whether a particular property is being let as holiday accommodation or not. This includes any house, flat, chalet, villa, beach hut, tent, caravan or houseboat. Accommodation that is advertised or held out as being suitable for holiday use is always treated as if it is holiday accommodation, even if there are restrictions not permitting its occupation throughout the year. However, it is not the case that all residential accommodation in a holiday resort is necessarily holiday accommodation (e.g. long-term out of season lettings are treated as normal VAT exempt residential lettings).

If a holiday property is sold (or a long leasehold interest is granted), such a transaction is vatable at the standard rate if the property is new or less than three years old.

Sales of accommodation that is more than 3 years old is exempt although, if the property is being sold as a going concern, it is possible that the transaction will be vat-free under the transfer of going concern regulations.

The default position on the letting of any property is that it is an exempt supply.

This is always the case for residential property and will not ever be any different unless the property is being supplied as holiday accommodation in which case it will always be standard rated.

For commercial properties it is possible to change this and make the letting subject to VAT by opting to tax the building and advising HMRC of this by submitting a formal election to this effect.

The advantage of doing this for a landlord is that if they have to spend any money on maintaining the property, they can reclaim any associated VAT costs.

The downside of making a property vatable in this way is that it reduces the appeal of the building to a tenant who is not registered for VAT, and in particular those who cannot reclaim any VAT they are charged because they make exempt supplies, which is typically a business involved in the financial services industry. This means that thought is needed before deciding to opt to tax if it is likely that such tenants might be interested in the property.

Once an option to tax has been made, in general it has to remain in place for at least twenty years, after which it can be revolved without any adverse VAT implications.

When acquiring a property that is the subject of an option to tax by the previous owner, consideration has to be given to registering for VAT before the property is bought to ensure that the property can be transferred at no VAT cost by using the transfer of going concern provisions.