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The Story of Polly

May 2016

*Featured In The EDP Norfolk Magazine*

Renting out properties as holiday homes can be a great way to boost income. However, many people are unsure if becoming VAT registered is a good idea or not. What follows is a brief anecdote highlighting some of the aspects to consider when deciding whether or not to registering for VAT is for you.

Polly understood that income from holiday homes was subject to VAT, but she initially decided not to become VAT registered as she was under the registration threshold, even though it would enable her to recover the tax on renovation costs. Polly didn’t want to become VAT registered as she didn’t want to pay VAT on the income which was estimated to be £15,000 in the first year. Associated VAT was £3,000.

The property needed some renovations, and new furniture, which would cost approximately £20,000 with associated VAT of £4,000, so Polly made the decision to voluntarily register for VAT and recover the VAT on the renovation costs. This is a net gain of £1,000 for Polly.

However, Polly took advice from her accountant who suggested that, having recovered the VAT on the development costs, she should deregister for VAT after a short period of holiday letting. Preferably over the off-peak season, so as to reduce the level of income that would be subject to VAT. The reason for this sage advice was a follows:

When Polly deregistered for VAT, she was required to account for VAT on goods that had been bought for the business, at the current market value. If the value of the goods is less than £6,000 when sold, the VAT is waived. This means if the second-hand value of all the furnishings, fixtures and fittings bought by Polly was only £4,000, there is nothing to repay to the VAT man, regardless of how much VAT was recovered when bought new.

The renovation work on the property is services, not goods, therefore the VAT is not repayable when Polly deregisters. The gain to Polly in the above example would be nearer £3000, assuming the short term, off-peak holiday income, was less than £5,000.

The moral of this tale is don’t be afraid of VAT, in some circumstances it may prove beneficial.

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