Adam is liable to income tax on the rental income for renting out the Notting Hill flat. The amount taxable is the rental income less expenses incurred wholly and exclusively for renting out the flat.

Obvious such expenses would be rent, rates, services charges, insurance, water rates, gas and electricity. I would deduct a proportion of these expenses because Adam is using the flat for private purposes as well. The proportion i would deduct is:-

1 - (No. of days the flat is rented out in month / number of days in the month).

Adam can also claim for:-
-costs of services, including the wages of gardeners and cleaners;
-letting agents fees;
-legal fees for lets of a year or less, or for renewing a lease of less than 50 years;
-accountants fees;
-other direct costs such as phone calls, stationery and advertising for new tenants.

Adam should not really have to worry about VAT. The rental of domestic propertyis exempt from VAT so Adam should not charge the occupiers any VAT.

However, if Adam is self employed, VAT registered and using the flat rate scheme then there may be a problem. The flat rate scheme is a turnover based scheme and includes all business supplies (with minor exceptions), which means that when calculating the turnover to apply the flat rate Adam will have to include the flat rental account for some VAT on that income.

London123 wrote:

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Adam is neither self employed nor registered for VAT. He has a full time job and does this on the side. I completely agree with you regarding income tax. Adam also hopes that one day HMRC will not come out and say that this is like a guest house so you should charge VAT since you are letting for only a few days like a B&B or a hotel.

Can Adam reclaim VAT on the the expenses?

Should he register as a self employed along with PAYE? Or wait for HMRC to send a self-assessment notice. How should he go about if he wants to take another flat in Islington?

Truemanbrown, thank you very much for your generous help.

Regards,
Adam

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 Hi Adam,

you write in the third person but sign as Adam? Don't worry, people can ask the occassional question on the site who are not bookkeepers.

When I saw this I thought that it was an exam question but you've convinced me that it isn't so I'll add a little to the discussion.

There is no need to register for PAYE for renting out a property but you need to tell HMRC that you need to complete a self assessment return as simply not receiving one does not make it HMRC's fault that you did not fill one in.

Refer to this page for details of how to register for Self Assessment :

http://www.hmrc.gov.uk/sa/register.htm

On the VAT front you can only reclaim VAT if you are registered for VAT otherwise one's expenses are simply 20% greater.

25 * 60 * 12 is £18,000 per annum so there is no requirement to register for VAT so HMRC will not come a knocking for that (VAT registration is required where turnover is expected to exceed £77k in a twelve month period).

This is not a hotel (not enough rooms plus fails on other definition criteria).

This is not an unusual arrangement. I've seen a lot of similar arrangements (although not amongst my stable of clients) normally where people rent a room during the week for work then go home at weekends. Because of the nature of their work (such as visiting trainers) they cannot commit to long term lets and also renting an appartment is more cost effective where there are groups or overnight visitors.

As it looks as though you are looking to expand by acquisition of expensive London properties and you would probably benefit from advice from a qualified accountant specialising in this area so as to ensure the most cost effective approaches to borrowing, VAT, exenses, whether it would be beneficial to incorporate, holding property in pensions, etc.

You could try using Trueman Brown, or perhaps alternatively Frauke Golding who is an accountant on the site who has their own propererty company. Just a couple of suggestions.

kind regards,

Shaun.

 

 

 

That is some good piece of advice from both of you. So in essence Adam do not have to worry about VAT but file a self assessment? Adam can keep doing this as long as he has just a few properties?

But I think it'd also makes sense to seek professional advice specially when he starts expanding.

Shamus, Adam is renting the notting hill property so don't you think it is a sublet?

Thank you