It is crucial to ensure that your business is VAT registered once it breaches the VAT threshold of £85,000. The threshold should be monitored on a rolling 12-month period, and many business operators do not realise this.
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 businesses will either lose a proportion of its turnover, or need to increase costs by 20% and pass this cost directly to the customer. Businesses 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.
Another benefit to registering for VAT is that 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. This could result in a repayment of VAT from HMRC which would also benefit the cashflow of the business.
FHL operators should also consider the Flat Rate Scheme (FRS) for VAT where annual turnover is £150,000 or less. Although VAT is still charged on all sales at 20%, the business only pays over a flat percentage of its VAT inclusive turnover. This is typically lower than the 20% standard rate, however it does mean that no input VAT can be reclaimed on expenses, with 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 £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 the benefit of a 1% discount applied in the first year so the rate would drop to 9.5% before reverting in year two.
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.