Serviced Accommodation: Income Tax, VAT at £90,000, and the TOMS Question
Index:
Serviced accommodation income is usually taxed as property income rather than as a trade, unless the level of service you provide is substantial enough to resemble running a hotel or guest house. Once your VAT taxable turnover crosses £90,000 in any rolling 12 months for 2026/27, you must register and charge VAT at the standard rate, because holiday and serviced accommodation does not qualify for the exemption available to ordinary residential lettings. Whether a rent-to-rent operator can instead account for VAT only on the margin under the Tour Operators' Margin Scheme is currently unsettled, following HMRC's Upper Tribunal win against Sonder Europe Ltd in January 2025.
I am seeing this question more often since the Furnished Holiday Lettings regime disappeared, because serviced accommodation used to sit comfortably inside that regime and nobody had to think too hard about the underlying Income Tax and VAT mechanics separately. Now that the regime has gone, the two questions, and a third question about TOMS if you don't own the properties yourself, all need answering on their own terms.
Is your income a trade or a property business?
This distinction determines your National Insurance position, your capital allowances, and whether Business Asset Disposal Relief could ever apply on a sale, so it is worth settling first. HMRC's guidance is direct on the clearest case: profits from running hotels and guest houses are taxed under the rules for trades, not as a property business, because the level of service provided goes well beyond simply letting space.
Serviced accommodation sits in the space between an ordinary short-term let and a genuine hotel operation, and the answer depends on how much service you actually provide, not on how the listing is marketed. The First-tier Tribunal addressed this directly in Julian Nott v HMRC, holding that the legal basis of the guest's occupation and the length of their stay are not, by themselves, the deciding factors; what matters is whether the services provided are substantial enough that the accommodation becomes only one part of a wider package being sold. A welcome pack, a mid-stay linen change, and a key exchange point toward property income. Daily housekeeping, breakfast provision, a staffed reception, or concierge-style services provided to every guest point toward a trade.
Getting this wrong in either direction carries a real cost. If you treat genuinely hotel-like income as property income, you understate your National Insurance liability and may misapply loss relief rules that only work for a trade. If you treat a straightforward short-let as a trade without the substance to support it, you risk an HMRC challenge that unpicks years of returns at once. With Furnished Holiday Lettings gone, there is no longer a special regime to fall back on if the classification is ambiguous; it is one or the other, decided on the facts of what you actually provide.
Why £90,000 catches serviced accommodation operators by surprise
The VAT registration threshold for 2026/27 is £90,000 of taxable turnover in any rolling 12-month period, a figure that has stayed unchanged since 1 April 2024. What surprises a lot of people moving from ordinary buy-to-let into serviced accommodation is that the exemption they may be used to for residential letting simply does not apply here.
Ordinary long-term residential letting is exempt from VAT. Holiday accommodation, and accommodation in hotels, inns, boarding houses and similar establishments, is specifically carved out of that exemption and taxed at the standard rate, regardless of how the charge is described or how long the guest stays. This means gross booking income from serviced accommodation counts in full towards the £90,000 threshold, and once you cross it, you must charge 20% VAT on your bookings, not just on any cleaning or extra fees.
There is a further trap worth knowing precisely, because it catches serviced accommodation operators who assume they get the same treatment as a hotel. Hotels benefit from a reduced value rule once a guest stays beyond 28 consecutive days, meaning only part of the charge remains subject to standard-rated VAT from the 29th day onwards. That reduced value rule applies specifically to hotels, inns, boarding houses and similar establishments, and HMRC's own guidance is explicit that it does not extend to self-catering holiday accommodation. A serviced apartment operator hosting a corporate guest for six weeks, without hotel-style daily services, cannot rely on this relief the way an actual hotel could, and the full charge remains standard-rated for the whole stay.
UK Serviced Accommodation Tax & VAT Explorer (2026/27): Trade vs Property, the £90,000 Threshold & the TOMS Calculator
Navigating the post-Furnished Holiday Lettings landscape requires a clear understanding of how HMRC classifies your serviced accommodation income and calculates your VAT liabilities for the 2026/27 tax year. This interactive dashboard breaks down the three critical compliance tests every UK operator faces: determining whether your guest services constitute a property business or a trade under the Julian Nott tribunal principles, tracking your rolling 12-month turnover against the £90,000 VAT registration threshold (including the 28-day rule trap), and assessing how the Upper Tribunal's decision in Sonder Europe Ltd impacts rent-to-rent Tour Operators' Margin Scheme (TOMS) claims. Simply switch between the tabs at the top of the tool to toggle the service substance checklists, adjust the booking and lease sliders to match your portfolio, and instantly visualise your exposure across standard-rated VAT and margin accounting.
The TOMS question: does it apply if you don't own the property?
The Tour Operators' Margin Scheme is a mandatory VAT accounting scheme that applies where a business buys in and resells certain travel services, including accommodation, as principal, without material alteration, for the direct benefit of the traveller. Where it genuinely applies, VAT is due only on the margin between what you paid the landlord and what the guest pays you, rather than on the whole booking value, and you cannot recover input VAT on the accommodation you bought in.
For years, many rent-to-rent serviced accommodation operators, businesses that lease properties from landlords on long agreements and then re-let them short-term to guests, applied TOMS on the basis that they were simply reselling accommodation. That position was tested directly in the case of Sonder Europe Ltd, a company leasing apartments from landlords on terms of two to ten years and sub-letting them to travellers for stays averaging around five nights.
The First-tier Tribunal initially agreed TOMS applied. HMRC appealed, and in January 2025 the Upper Tribunal reversed that decision, holding that the long lease Sonder obtained from each landlord was not a supply made for the direct benefit of the traveller, and that Sonder had materially altered what it received by furnishing the properties and converting long-term leases into short-term holiday lets. On that basis, the Upper Tribunal found Sonder was making its own in-house supply to guests, not reselling a bought-in travel service, so TOMS did not apply and VAT was due on the full value of the bookings rather than the margin.
This decision is the current leading authority, but the ground here is genuinely unsettled rather than closed. The reasoning turns on how far the terms of your head lease from the landlord differ from the terms you offer guests, and how much alteration, furnishing, or additional service you add along the way, which makes this a fact-specific question for every individual rent-to-rent arrangement rather than a single rule that applies uniformly across the sector.
Model | VAT starting position | Key question to resolve |
You own the property outright and let it as serviced accommodation | Standard-rated once registered, on the full booking value | Whether the service level makes this a trade for Income Tax purposes |
You lease the property from a landlord on a long agreement and re-let it short-term (rent-to-rent) | Full booking value standard-rated is the default position after Sonder Europe | Whether your specific lease terms and level of alteration could still support a TOMS margin claim |
What this means in practice, worked through
Take an operator leasing three apartments from landlords on five-year internal repairing and insuring leases, paying £1,200 a month each, furnishing them, and re-letting them on Airbnb and Booking.com at an average of £2,800 a month per apartment in gross bookings, giving annual turnover of £100,800 across the three units. That figure alone exceeds the £90,000 VAT registration threshold, so registration is compulsory regardless of how VAT is ultimately calculated on each booking.
If this operator's lease and letting pattern resembles Sonder's, meaning long leases converted through furnishing and short-term re-letting into holiday accommodation, the current position following the Upper Tribunal decision is that VAT is due on the full £100,800 of gross bookings, not on the roughly £56,000 margin between the lease cost and the letting income. At 20%, that is the difference between VAT of around £16,800 on the full value and a much smaller sum calculated on the margin, a gap significant enough that assuming TOMS applies without checking the specific facts against the Sonder reasoning is not a safe starting position for 2026/27.
What to do now, in order
Establish honestly whether your level of service makes this a trade or a property business, using the substance of what you provide, not the marketing description, since this decides your National Insurance and capital allowances position.
Track your rolling 12-month taxable turnover monthly, including the full gross booking value, not just fees or commission, since holiday and serviced accommodation does not benefit from the residential letting exemption.
Register for VAT within 30 days of crossing £90,000, or immediately if you expect to exceed it within the next 30 days.
If you operate a rent-to-rent model, compare your actual lease terms and the degree of alteration you make against the facts in Sonder Europe before assuming TOMS is available, since the Upper Tribunal's reasoning turns on exactly this comparison.
Do not assume the 28-day reduced value rule protects long-stay bookings, since it applies to hotels and similar establishments but not to self-catering holiday accommodation.
Keep records showing the services actually provided to guests, since this evidence is what would settle both the trade-versus-property-business question and, if relevant, any TOMS argument about material alteration.
Where your rent-to-rent structure is close to the line drawn in Sonder Europe, or where you are trying to work out whether years of past VAT accounting need correcting one way or the other, this is a genuinely fact-heavy exercise that benefits from a proper comparison against the actual tribunal reasoning rather than a general assumption either way.
FAQs
Is serviced accommodation income taxed the same as a normal buy-to-let?
Not necessarily. If the services you provide are limited, it is generally taxed as property income like an ordinary let. If the services are substantial enough to resemble running a hotel or guest house, it is taxed as trading income instead, with different National Insurance and relief consequences.
Do I need to charge VAT on serviced accommodation bookings?
Yes, once your taxable turnover exceeds £90,000 in any rolling 12-month period for 2026/27, because holiday and serviced accommodation is specifically excluded from the VAT exemption available to ordinary residential letting.
What happened to the Furnished Holiday Lettings tax benefits?
The Furnished Holiday Lettings regime was abolished for Income Tax and Capital Gains Tax from 6 April 2025, so serviced accommodation income is now taxed under the ordinary property income or trading rules described above, without the enhanced reliefs that regime previously offered.
Can I get the 28-day discount on VAT for long-stay guests like a hotel does?
Generally no, if you operate self-catering serviced accommodation rather than a hotel-style establishment. The reduced value rule for stays beyond 28 days applies to hotels, inns, boarding houses and similar establishments, and HMRC's guidance confirms it does not extend to self-catering holiday accommodation.
What is the Tour Operators' Margin Scheme and why does it matter for serviced accommodation?
It is a mandatory VAT scheme for businesses that buy in and resell travel services, including accommodation, allowing VAT to be calculated on the margin rather than the full price. It matters because if it applies to a rent-to-rent business, the VAT bill can be substantially lower than accounting for VAT on the full booking value.
Can rent-to-rent serviced accommodation operators still use TOMS?
It depends heavily on the facts. Following the Upper Tribunal's decision in HMRC v Sonder Europe Ltd in January 2025, the current leading authority holds that TOMS did not apply to that operator's arrangement, because the long lease it took from landlords was materially altered before being re-let, but each arrangement needs comparing against those specific facts.
What was the outcome of the Sonder Europe case?
The Upper Tribunal found that Sonder's leases from landlords were not supplies made for the direct benefit of travellers and had been materially altered through furnishing and conversion into short-term lets, so TOMS did not apply and VAT was due on the full booking value rather than the margin.
If I own my serviced accommodation properties outright, does the TOMS question affect me?
No. TOMS only applies to businesses that buy in and resell accommodation from a third party. If you own the property yourself, the question does not arise, and standard VAT rules apply once you are registered.
Does my serviced accommodation income affect whether I need to register for Making Tax Digital for Income Tax?
That depends on your total qualifying income across all sources, which is a separate threshold from the VAT registration threshold discussed here and is not covered in this article.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
Disclaimer:
This article explains the general position for the 2026/27 tax year and is accurate at the date of publication. Tax outcomes depend on individual circumstances, and rules change. It is not advice for your situation. For guidance on your own position, speak to a qualified accountant or tax adviser. My Tax Accountant accepts no liability for action taken solely on the basis of this article.
