HM Revenue & Customs has launched a crackdown on the booming short-term rental market, initially targeting around 1,000 property owners who suspect they have not paid enough tax.
Based on information received from online booking platforms such as Airbnb, the UK Revenue Agency is sending out its first so-called “invitation” letters this month to people it believes have not declared rental income on their tax returns. The recipients of the letters have 30 days to respond or risk a formal investigation into their tax matters.
HMRC’s scrutiny comes as the holiday rental market has grown rapidly in recent years, helped by the preferential tax treatment of short-term rentals over traditional let-to-let.
Around 127,000 people in the UK declared ownership of furnished holiday businesses on their tax returns for the 2019-20 tax year, the most recent year for which figures are available.
Airbnb does not provide a geographic breakdown of the number of rentals by country, but a 2020 analysis by the Guardian showed that the number of active listings in the UK increased from 76,000 to 257,000 between April 2016 and January 2020. Airbnb said in last year that the typical UK host earned just over £6,000 a year.
“While there are always exceptions, I think the lack of a tax on short-term rentals is more accidental than intentional,” said Stefanie Tremain, a partner at accounting firm Blick Rothenberg.
She added that the property income system was now “very complicated after years of tweaking the legislation” and HMRC would not accept ignorance of the rules as an excuse.
David Fell, a senior analyst at real estate agency Hamptons International, said some traditional buyer-to-let investors have moved to vacation rentals because of “better tax treatment.”
Unlike long-term rental rules, holiday home owners can benefit from benefits, including full income tax relief for mortgage interest deductions and lower capital gains tax on their sale.
Chris Etherington, a partner at accounting firm RSM, said after an initial campaign, tax authorities could start checking whether owners of furnished holiday homes “meet strict rental criteria”.
A Tax Simplification Office report in November – published shortly before the shutdown of the statutory body – called on ministers to review the sector’s complex tax system.
HMRC has not estimated how much tax from the short-term rental market remains unpaid, but said it was working with online rental platforms “to gain a more detailed understanding of the sector and who is operating in it”.
Last summer, the government launched a consultation proposing a national short-term rental register that could help with tax collection.
HMRC described cover letters as a “routine activity” and added: “We believe our customers want to pay the right amount of tax. . . we are taking steps to make it as easy as possible for people to file their taxes correctly.”