Flat Rate Scheme for furnished holiday lets

With many businesses operating within the Leisure sector experiencing increased turnover driven by both ‘staycation’ demand and higher average sale prices, care must be taken to ensure any VAT reporting requirements are up to date.

Many Furnished Holiday Let (FHL) operators are not registered for VAT as historically turnover never breached the registration threshold of £85,000. However, there is sometimes a misconception that the threshold is only reviewed at the end of the financial year, when in fact, it is a continual rolling 12-month position. With the recent increase in both demand and average sale prices, many businesses are now breaching the threshold and require to be VAT registered. Looking ahead, with the VAT threshold frozen until April 2024, fiscal drag may result in more FHL businesses being pulled into the VAT regime.

The supply of FHL accommodation is a standard rated supply with VAT chargeable at 20%. This can have a severe impact on the business, as without passing the VAT cost directly to the customer, the business will lose a proportion of its turnover. They will get the benefit of recovering VAT on expenses but quite often the main expenses operators incur are not subject to VAT, so may only provide minimal savings.

The Flat Rate Scheme (FRS) for VAT offers an alternative to the traditional method, whereby VAT is still charged on all sales at 20%, however the business only pays over a flat percentage of its VAT inclusive turnover. No input VAT however can be reclaimed on expenses within the exception of any capital goods costing in excess of £2,000.

The FRS % to be used is based on the sector the business is operating within, and for FHL this is 10.5%. For example, a business with VAT inclusive turnover of £100,000 would pay across £10,500 of VAT in the year however it will have charged £16,667 of VAT to customers. The balance retained is meant to compensate the business for not being able to reclaim input VAT on expenses incurred. Prior to registering for VAT, a quick calculation can be done to ensure there is a net benefit of using the FRS. There is also a 1% discount applied in the first year so the rate would drop to 9.5% before reverting in year two.

There are a few other advantages that can be realised when registering for VAT either under the traditional method or FRS. The business can look back 6 months from the date of registration and reclaim VAT on expenses incurred. They can also go back four years and reclaim VAT on any capital assets purchased that are still in use at the time. We have had great success in reclaiming input VAT on the cost of FHL accommodation assets (lodges, wigwams, frame huts etc.) and other assets on registration. Recently, we secured over £20,000 of input VAT back for a client which provided a vital cash injection.

As with any tax, every situation is unique and professional advice should be taken if you are unsure of which option is right for you. For more information or to discuss your circumstances, please get in touch with our furnished holiday let specialists by calling one of our offices or emailing leisure@eqaccountants.co.uk.