Airbnb and VAT: Why Holiday Let Businesses May Owe More Tax Than Expected

The rise of platforms like Airbnb has transformed the property market, with more landlords moving into short-term holiday lets rather than traditional long-term rentals.

However, while this model can be more profitable, it also brings complex VAT implications—and getting it wrong can be costly.

Is Airbnb income subject to VAT?

In most cases, the rental of residential property is exempt from VAT, meaning no VAT is charged on rent.

But there is a key exception.

If you are providing short-term holiday accommodation, similar to a hotel or serviced apartment, your supplies are not exempt. Instead, they are treated as taxable supplies and are subject to VAT at 20%.

This applies to many Airbnb-style lets, particularly where:

• Guests stay for short periods
• The property is furnished
• Additional services (cleaning, linen, etc.) are provided

As a result, many property owners and operators may need to register for VAT and charge VAT on their income.

The growing business model: Leasing and subletting

A common structure in this space is:

1. A business leases residential properties (often on 1–3 year agreements)
2. The landlord charges VAT-exempt rent
3. The business then rents the property out as short-term holiday accommodation

Because the end supply is taxable, VAT is typically charged on the full rental income received from guests.

Can you reduce VAT using the Tour Operators Margin Scheme (TOMS)?

Some businesses have tried to reduce their VAT liability by using the Tour Operators Margin Scheme (TOMS).

Under TOMS:

• VAT is only applied to the profit margin, not total sales
• It is commonly used in the travel industry for package holidays and bought-in services

At first glance, this seems attractive for Airbnb-style operators, as it could significantly reduce the VAT payable.

HMRC challenge: Is TOMS actually allowed?

HMRC has challenged the use of TOMS in this sector, arguing that it is not applicable to serviced accommodation businesses.

This issue was tested in the courts in the case of:

Sonder Europe Limited v HMRC [2025]

The Sonder case: A key VAT ruling for Airbnb operators

Sonder Europe Limited operated a model where it:

• Leased apartments from landlords
• Let them out as short-term serviced accommodation

The company argued that TOMS should apply, meaning VAT was only due on its profit margin.

Initial decision (First-tier Tribunal)

The First-tier Tribunal initially agreed with the taxpayer and allowed the use of TOMS.

Appeal decision (Upper Tribunal)

However, HMRC appealed—and the Upper Tribunal overturned the decision.

The key issue was what was actually being supplied.

• Sonder acquired leasehold interests in properties
• It then supplied short-term occupation rights to guests

The Tribunal concluded that:

The service supplied to guests was materially different from what was acquired from landlords.

This meant the supplies were not simply resold without alteration, which is a requirement for TOMS to apply.

Final outcome: TOMS does NOT apply

The ruling confirmed that:

• TOMS cannot be used for Airbnb-style serviced accommodation businesses
• VAT must be charged on the full rental income, not just the margin

This significantly increases the VAT liability for many operators in this space.

What this means for landlords and property businesses

If you operate short-term lets, you should carefully review your VAT position.

Key considerations include:

• Whether your activity falls within taxable holiday accommodation
• Whether you need to register for VAT
• How VAT impacts your pricing and profitability
• Ensuring you are not incorrectly applying TOMS

Failure to get this right could lead to:

• HMRC assessments for underpaid VAT
• Interest and penalties
• Cash flow issues if VAT has not been factored into pricing

Practical tip: Review your structure early

This area is evolving, and many businesses have historically taken an incorrect approach.

If you:

• Let properties through Airbnb or similar platforms
• Lease properties and sublet them as serviced accommodation
• Are unsure whether VAT applies

It is important to review your position before HMRC does.

Need help with VAT on Airbnb or holiday lets?

At Merranti Accounting, we help property owners and operators navigate complex VAT rules and avoid unexpected liabilities.

If you would like a VAT review of your property business, get in touch with our team today.