Tax tips for farm holiday accommodation management

There are many aspects of tax that holiday accommodation operators must get right in the day-to-day management of their businesses to satisfy HMRC and capitalise on the reliefs available.

There are differences in the tax system according to how a property is operated. There is no “one size fits all”, says Stuart Bell of Cumbria accountant Dodd & Co.

Businesses get tripped up by rules ranging from how to account for VAT on deposits to offsetting expenditure. Mr Bell sets out how to avoid some of the common pitfalls.

See also: Changing land use – tax, legal and planning considerations

VAT on deposits

How VAT is accounted for on deposits will depend on the “tax point” – the date when the payment is received.

In the case of deposits, it depends which is the earlier – receipt of the payment or the invoice date – unless in the unlikely event of the date of stay occurring before either of these. 

Each receipt, whether it is a deposit, full payment, part payment or a final payment, will have its own tax point. This often means that the VAT due on a booking is spread over a number of returns.

The correct identification of the tax point is equally as important when considering whether a business has exceeded the £80,000 VAT registration threshold.

The rolling total calculation should be based on the individual tax points rather than the date of the stay.

It is important to ensure that the computerised accounting system used is applying VAT at the right point in time, especially in relation to deposits and part payments.

Identifying income in the business accounts

Income should be identified in the accounts at the time of the stay. For example, accounts for the year end 31 March 2023 may take a booking made and paid for on 25 March 2023 for a stay date of 23 April 2023.

In the accounts to 31 March 2023, the income received should be recognised as deferred income on the balance sheet and will therefore not contribute towards the profit level – and tax bill – for the 31 March 2023 year.

It will be recognised as sales in accounts to 31 March 2024.

Accounting for payments when a booking is cancelled

If a guest cancels after paying a deposit or the full balance, the business could already have paid the VAT due on that, but when the money is refunded, the business can get VAT relief on that refund.

If there is a cancellation but the deposit is non-refundable, the VAT on the deposit will have been paid and that is the correct action.

The deposit will be recognised in the accounts at the point of cancellation, even if it was for a stay further in advance.

VAT flat rate versus standard rated

For many businesses in the hospitality industry, it is beneficial and more cost effective to be registered under the flat-rate scheme instead of the standard rated scheme. 

A flat-rate percentage of VAT is paid on gross sales – for holiday accommodation it is 10.5% with a 1% discount in an operator’s first year in the scheme.

Revenue or capital?

Deciding whether some expenses are revenue or capital in nature is a specialist area of tax legislation, so professional advice may be needed to ensure the correct treatment.

This applies particularly to capital tax reliefs, to ensure the maximum is claimed, particularly at the start of a business when these expenses are likely to be significant.

However, no VAT is reclaimable on purchases except for certain capital assets costing more than £2,000.

There are a couple of reasons why this is attractive. First, it is less of an administrative burden to only have to work out VAT on sales instead of sales and purchases.

Second, there is often very little standard rated expenditure in a holiday accommodation business so the flat rate can be more financially advantageous.

To join the scheme, VAT turnover must be £150,000 or less, excluding VAT, and an application must be made to HMRC.

Allocating VAT on booking fees

While cloud accounting software may deal with the flat-rate scheme calculations, it isn’t foolproof and there is a common misconception around booking agent fees. 

Under the flat-rate scheme, VAT is charged to customers on all sales at the standard 20% rate, so invoices won’t look any different to when VAT is charged at the usual rate.

However, the operator pays VAT to HMRC based on a set proportion of their total sales income at 10.5% on the gross sales amount.

Where booking agents deduct their fees first and pay the business net of commission, the flat-rate scheme proportion is still applied to the gross total sale – the figure before commission is deducted.

Offsetting expenditure

Many of the expenses claimable, and which can be set against turnover, apply to all types of income streams, but others depend on the nature of the business and the type of property letting.

The general test is that expenses can be deducted if they are incurred wholly and exclusively for the purposes of running the business or renting out the property.

Permitted expenses might include insurance, letting agent and management fees, accountancy fees, water rates, gas, electricity, council tax, and cleaning and gardening costs. 

Direct costs such as for advertising, stationery and telephone can also be claimed. 

General maintenance and repairs are allowable expenses, but relief is not possible where there has been an improvement to the original asset that is being replaced.

This is because these are capital expenses and, as such, cannot be claimed as a deduction when calculating business or rental profits. 

However, tax relief may be available if the property or business is sold, so it is worth keeping a record of what has been spent.

How capital allowances can be applied

Some types of capital expenditure qualify for capital allowances, depending on the nature of the business or property rental. 

Capital allowances can be claimed by most trading businesses such as B&Bs, guest houses, caravan sites and qualifying furnished holiday lettings, with allowances on equipment and machinery purchases and some integral fixtures of a building. 

The current annual investment allowance (AIA) is £1m on qualifying purchases. This means that 100% of the cost of the asset up to this limit in the year of the expenditure can be written off.

For furnished holiday lettings that qualify for this relief it can be very attractive as it covers the cost of items such as alarm and electrical systems, emergency lighting, cold water systems, heating and air conditioning, carpets and flooring, kitchens, sanitaryware, signage, and insulation costs. 

Accounting for new business expenses

Expenses are often incurred when a new business or property rental is being established and before an income is generated. 

If these expenses are incurred within seven years prior to the start date and would have been tax deductible had they been incurred while the business was operating, they can be treated as if they were incurred on the first day.

This means that tax relief can be claimed on them, in addition to the other business expenses in the first set of accounts.

HMRC nudge letters offer chance to declare income

Holiday property owners suspected of underpaying tax have received so called “nudge” letters from HMRC after a trawl for evidence on online booking platforms.

The tax authority thinks it is missing out on important revenues from this sector and is giving operators the opportunity to rectify any discrepancies without facing formal penalties.

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

Find out more