Converting a building to capitalise on ‘holiday staycations’? Read our VAT advice first!

Help for Furnished Holiday Let (FHL) owners with how to avoid an unexpected VAT bill.

With the pound in our pockets stretching less than it previously did against other currencies, many families are looking closer to home for their much-needed breaks. This has led to diversification in the UK holiday accommodation market with holiday lettings in cottages, converted barns and other “staycation” accommodation now competing with traditional hotels and bed and breakfast establishments.

Farms and estates can capitalise on this trend by utilising existing residential accommodation or converting barns and outbuildings to cope with the demand.

This article highlights some of the VAT issues associated with the provision of holiday accommodation and some VAT reliefs on works to such properties.

What is holiday accommodation?

In VAT terms, “holiday accommodation” includes any accommodation in a building, hut (including a beach hut or chalet), caravan, houseboat or tent which is advertised or held out as holiday accommodation or as suitable for holiday or leisure use, but excludes any accommodation in a hotel or similar establishment.

This definition is important as the letting of holiday accommodation is subject to VAT at 20%.  As traditional residential lettings are VAT exempt, some farm and estate business often overlook this fact.  If the farm and estate business is already VAT registered, VAT will have to be charged on the holiday rental income. If the business is not VAT registered, it will have to be mindful of the VAT registration threshold which is currently £83,000 in a 12 month period.

The imposition of a 20% VAT charge can impact on pricing particularly in areas where rates are competitive, so knowing VAT will apply at an early stage can allow the business to plan and adjust prices to maximise income and ensure that the venture makes sufficient profit.

VAT Recovery & Reducing VAT costs

One of the benefits of VAT registration and charging VAT on the holiday lettings income is that any VAT incurred on the running of the property can be recovered.  This can potentially include VAT renovation and repair costs and furnishings for the property itself.

As holiday accommodation often meets the VAT “dwellings” tests, some of the concessions available for reduced ratings on conversions and renovations to residential property are available, subject to certain conditions.  A 5% reduced VAT rate is available for conversions of buildings into residential accommodation and also for renovations to residential accommodation that has been empty for 2 years or more.  This concession is also available where changes are made to the number of “units” as a result of the work (e.g. converting one house into 4 apartments).

Whether your business is VAT registered or not, if you are considering venturing into the FHL sector we recommend you take some advice to ensure that savings are maximised and the VAT position does not impact on your profits.

If you have a VAT query contact Iain Masterton, Senior VAT Manager on 0131 558 5800 or email