The VAT landscape is complicated and no more so where holiday lettings are involved. Here, we explain the implications of the VAT registration threshold, overseas property and the Tour Operators Margin Scheme.

The direct tax landscape for furnished holiday lets (FHL) will change in April 2025 and whilst those changes do not impact the VAT treatment of FHLs, the VAT rules do carry potential pitfalls. So, whether income from FHLs is your only business activity or it is an income stream in addition to your main business, it is important to be aware of the issues.

Taxable income and VAT registration
Unlike residential lettings which are VAT exempt, income from FHL is taxable. With the current VAT registration threshold standing at £90,000, many landlords will not need to register, particularly if their only taxable income is from those FHLs.

However, many landlords are not aware that you cannot separate different business activities undertaken by the same legal entity even if individually they fall below the registration threshold. For example, a sole proprietor landscape gardener with taxable income of £70,000 topped up with £24,000 from a FHL will exceed the £90,000 threshold, meaning they are required to register for VAT.

Another common mistake is thinking they can divide properties between more than one legal entity to keep below the threshold. For example, a husband and wife might each own one FHL each with income of £45,000 and £55,000 respectively. HMRC would almost certainly consider them to be a single taxable person with the threshold having been exceeded and direct that they should be brought together for the purposes of VAT registration.