Tax Treatment of Receiving Income from Sub-Letting Your Caravan

The following is intended to be an outline of the general principles and a starting point for more detailed discussions on an individual basis.

---

Introduction
When you receive income that you have not paid tax on you should notify the Inland Revenue that you have this income. If you do not, then in addition to any tax due, you may also have to pay interest and penalties.

The income is regarded as either furnished lettings or furnished holiday lettings.

The profit or loss arising on letting income is calculated by preparing Income & Expenditure Accounts on an annual basis to a 5 April year-end. Special rules may apply at commencement and cessation if furnished holiday lettings apply.

There are also special rules if more than one caravan is let.

Income is regarded as monies receive by you and the expenditure is monies spent by you when renting the caravan. Where relevant, income due under guaranteed letting agreements is included in this definition.
Payments include:-

1. Commission to agent
2. Gas and electricity
3. Rates
4. Site rent
5. Repairs to caravan and renewals of soft furnishings
6. TV licence and TV hire
7. Linen hire
8. Insurance
9. Finance and interest charges
10. Cleaning, telephone, postage and stationary
11. And in most circumstances, Capital Allowances (tax equivalent of depreciation).

An adjustment is required when the caravan is not available for hire (this would include periods when you use the caravan yourselves, when it is not available for hire and where you rent it to family and friends at a rate which is not at the "going rate" and is therefore not considered to be a realistic charge).

It is most important that all supporting invoices, statements, finance agreements etc., are safely retained by you, so there is back-up information to support the figures shown in the income and expenditure accounts.

Normally, losses relating to furnished lettings are carried forward and set against future profits. However, in the majority of cases, Capital Allowances may be set sideways against your general income of the same year. These are instances where the caravan is available for let for more than 50% of the park-letting season and lettings in excess of 70 days have been achieved at a commercial rate. There are tax benefits to furnished holiday lettings, which include relief for losses on the same basis as traders. This allows the losses to be set against income in the same year, or in certain circumstances, at commencement and cessation of the receipt of income, in earlier years. Traders may also have Capital Gains Tax Relief.

To qualify for this there are 5 tests that must be satisfied in full:-

1. the caravan must be available for letting to the public on a commercial basis for 140 days or more, and
2. let commercially for 70 days, and
3. not occupied for more than 31 days by the same person in any period of 7 months, and
4. let at a commercial rate
5. let with a view to realising a profit

---

Tax Due
Profits will be added to other income in the same year and charged to tax at the appropriate rate. For an individual who has paid tax at the basic rate on other income a profit of £3,000 would have tax due of £660 (for a 40% taxpayer, the tax due will be £1,200). Any tax will normally be due and payable on or before the 31 January on the income arising in the preceding year ending on 5 April.

---

Loss Relief
The 'losses' arising from the above are available to be offset against other income arising in the same income tax year. For an individual who has paid tax at the basic rate on his other income, a claim of £3,000 would produce an income tax refund amounting to approximately £660. (For a 40% taxpayer, the refund could amount to £1,200). In the case of furnished lettings if losses of £4,000 were obtained of which £3,000 related to Capital Allowances then £1,000 would be carried forward and be available to set against future profits whilst £3,000 remaining will be set off sideways to give a rebate of approximately £660 (for a 40% taxpayer, the repayment issued would be £1,200).

---

Guidelines

1. A commercial rent must be charged and the caravan let with a view to realising profit.
2. The caravan must also be let for 70 days minimum and available for letting for 140 days minimum. The caravan must not be let to anyone for 31 days or more in any seven-month period.

---

Accounts
Accounts in the form of an income and expenditure statement must be produced each year and made up to 5th April. The accounts will include private adjustments to reflect the owner's private usage of the caravan.

Due to the technical nature of the work involved, it is strongly recommended that you employ the services of a professional accountant to do this on your behalf. A fee is charged for this service, the level of which can be agreed in advance. Apart from submitting the accounts and related claim, the accountant will be able to correspond as required with the tax office to answer any queries that may arise. You will not need to deal with the Inland Revenue yourself.

---

Refunds
Once the claim has been processed by the Inland Revenue, the repayment will be sent directly to you in the form of a cheque.

Nowadays, due to the introduction of Self-Assessment, it will be necessary for you to complete a Self-Assessment Tax return before the refund can be made to you.

As an integral part of the service provided to all our caravan owner clients, completion and submission of this form is already included in our standard fixed fees (currently £190 + VAT 2003/2004).