Will the FHL Changes in budget affect VAT on FHL

Will FHLs become exempt for VAT now no longer treated as a trade?

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With the removal of FHL regime for Income & Capital Gains Tax this will effectively remove the deemed trade status of holiday lettings. For VAT registered people who also have an FHL at present they have to charge VAT on their rentals does this mean that these very short term lettings will fall back into the normal rules relating to property letting for VAT and become exempt? or will we end up with a position where there is no "business" but VAT is payable on the lettings

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By ireallyshouldknowthisbut
08th Mar 2024 09:30

Different legislation.

My understanding is that Residential letting is exempt from VAT rather than FHL being specfically taxable, that is to say its caught under the general rules.

I am sure somone smarter than me knows the references!

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By richard thomas
08th Mar 2024 10:07

No, why should it?

There is no "deemed trade" status for the taxation of FHL profits. They are property business profits taxable under Part 3 ITTOIA (and CT equivalent) but with some special rules. As far as I can call the only "deemed" trading provision is the loss relief one, which since 2011 has been a completely pointless rule as it gives no more leeway to use losses than the property business loss rules.

And as for VAT, as ireallyshouldknowthat says, different legislation - para (e) Item 1 Group 1 Schedule 9 VATA 1994, which is cast in wholly different terms from the FHL IT & CT rules, and is for a different purpose.

And why should the changes mean there is no "business" (for IT/CT purposes I presume)? You referred to "trade" above, a different thing altogether.

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By JazzySasha
08th Mar 2024 10:14

EDIT: Richard beat me to it!

VAT Act 1994 - Schedule 9, Group 1 paragraph 1(e)- land tells you that holiday accommodation is excluded from the exemption for land (which may be what you mean by the "normal rules").

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By Paul Crowley
08th Mar 2024 10:16

No
Hotels have a reverse thing. If a client stays for long enough (28 days) in continuous occupation then the room fee becomes exempt
https://www.gov.uk/guidance/hotels-holiday-accommodation-and-vat-notice-...
This is where to look stuff up, subject to it being from HMRC.

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By Jason Croke
08th Mar 2024 10:17

Can't see there being any changes to the VAT status of FHL's.

Holiday accommodation is dealt with in VATA 1994, Sch. 9, Grp. 1, which defines the provision of accommodation by a hotel, inn, boarding house or ‘similar establishment’, and holiday accommodation. FHL's fall under this definition. FHL's are also defined as whether it is advertised or held out as holiday accommodation or whether it is suitable for holiday or leisure use.

This additional definition helps differentiate between a BTL landlord renting properties to tenants and someone with a 2nd home renting it out via AirBnB or similar.

Income from holiday accommodation is therefore standard rated. The letting of a property during the off season - for more than 28 days - could still be exempt - Section 5 and 5.6 in particular
https://www.gov.uk/guidance/hotels-holiday-accommodation-and-vat-notice-...

The removal of FHL reliefs for CT/CGT or whatever are not connected to the VAT treatment, I don't believe the removal of the direct tax reliefs would mean that FHLs are no longer seen as a business activity/trade for VAT purposes. There are many scenarios where direct tax does not interfere with VAT rules (VAT tends to sit in its own world on top of whatever else is going on around it).

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By More unearned luck
08th Mar 2024 11:19

Nor should the IHT position change. Cases with exceptional facts as in Graham [2018] (TC6536) might still get BPR.

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By Ruddles
08th Mar 2024 15:18

I agree that there is no statutory reason why the VAT treatment of provision of furnished holiday accommodation should change as a consequence of the Budget announcement. That said, if HMRC are effectively saying that they are no longer going to make a distinction between FHL and other types of residential letting for certain tax purposes it would be only fair to argue that it should be the same for all taxes. As we know, though - very little is fair in tax.

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By [email protected]
19th Mar 2024 10:39

Some good answers here but you raise a very interesting question and one the government has most likely not considered as there was no consultation on this decision. FHL’s avoided section 24 because it was rightly deemed that their trade more resembles the hotel business. However they only provide for a letting service unlike a B&B or hotel. Ergo the removal of the FHL tax rules for qualifying properties now effectively make the trading of the asset more similar to the buy to let sector. Yes tax and vat live in and are dealt with by entirely different regimes. Fairness will unlikely prevail in the short term, however I have no doubt that if this is the case, a raft of legal challenges will follow and any reasonable judge would have to, in my opinion, fall on the side of fairness. How can you, overnight, lose your business status as an FHL yet still be required to register your business for VAT when rental income is exempt for all other similar property investments. This begs the question of what will happen with FHL’s currently registered for business rates and not council tax.

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