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VAT Notice 733

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Is FRS tax calculated on gross or net holiday let income

Holiday lettings are taxable

Income received from land and property is usually exempt from VAT. However, some supplies are standard-rated by statute and subject to VAT, e.g. car parking fees and storage. Supplies of accommodation for temporary visitors in hotels and similar establishments are always standard- rated, hence why our subscriber is registered for VAT.

Tip. Buy-to-let rental income is always exempt from VAT, i.e. where the tenant occupies the property as their main residence and pays council tax and utility bills, etc.

Flat rate scheme

The basic principle of the flate rate scheme (FRS) is that you account for VAT each quarter by applying a specific flat rate percentage to your gross business income. There are 55 different categories and you must choose the one that applies to your business. If your activity does not fit exactly into any of the categories, you will choose one of the two sweep-up categories that are subject to the 12% rate, i.e. “any other activity not listed elsewhere” or “business services not listed elsewhere”.

You cannot claim input tax if you use the scheme because the percentages reflect your loss of input tax.

Tip. As an exception, you can claim input tax if you purchase capital goods that cost more than £2,000 including VAT, such as a van or computer per VAT Notice 733 (see The next step ). Trap. You cannot claim input tax on the cost of capital services, e.g. building materials and labour used to build an extension to your premises.

Has our subscriber made errors?

The clue was in the previous paragraph: our subscriber must apply the relevant flat rate percentage to gross business income. Their rate is 10.5% as “hotel or accommodation”.

Example. Our subscriber’s gross income in January 2024 was £12,000; the online booking agency charged 15% commission plus VAT, i.e. £1,800 + £360 VAT = £2,160 and paid £9,840 into our subscriber’s bank account. The correct FRS tax to pay is: £12,000 x 10.5 % and not £9,840 x 10.5%. Our subscriber has underpaid VAT by £226.80.

Tip. Our subscriber must calculate how much tax has been underpaid for the last four years, the error correction period in the legislation.

Trap. If the total tax owed exceeds £10,000, our subscriber must notify HMRC of the error by completing FormVAT652 . If the tax owed is less than £10,000, it can be included as an adjustment on their next VAT return.

Leave the scheme?

The FRS is not ideal for a business that has higher than average input tax for its particular trading activity. For example, if our subscriber did not use a booking agent that charged VAT and handled bookings themselves - perhaps through their own website - the FRS would produce a better result. The best strategy might be for our subscriber to leave the scheme and return to normal accounting on future returns, i.e. output tax less input tax. Trap. You cannot leave the scheme retrospectively, only for current and future periods. You must notify HMRC of your decision to leave in writing.

The next step: VAT Notice 733