Lets NOT get the party started....
Make sure you have the right cover for the unexpected...
Many people in the UK are waking up to the endless possibilities that can arise from renting what you have. Whilst these opportunities can be lucrative, be sure to think about the tax implications. Doing so can save you thousands of pounds or land you in trouble depending on the actions you take.
A tale of two worlds.
When a hotel booking is made online, many will incur a 20 per cent VAT charge depending on the size of the business. Sites like Airbnb, Homeaway and Wimdo offer ordinary people the opportunity to rent out their own rooms for a fraction of the price these hotels charge. Despite these websites coming with the huge advantages that global companies bring, the room’s owners don’t have to pay VAT themselves so long as they earn less than £83,000 a year from rentals. This gives many owners in the sharing economy at a competitive advantage.
If you’re renting out a room, consider signing up to the Rent a Room scheme.
This is an optional scheme available to tenants or owner occupiers letting out furnished accommodation to a lodger in their main home. By doing this, you’ll be able to keep up to £7,500 a year tax free from earnings derived as a result of renting out your room.
If you’re letting out jointly, the tax-free amount is reduced to £3,750 each. If the income derived from this type of letting is less than the allowance then your exemption is automatic and you won’t have to do anything. If you’re earning over the threshold from this activity, be sure to let HMRC know on your tax return to claim the allowance.
The disadvantage to being in the scheme? If you plan to treat renting out your room like a business you won’t be able to deduct any expenses such as those associated with wear and tear and replacing broken items. If you choose not to opt into the scheme, simply record your income on your tax returns along with any associated expenses.
Income from the sharing economy could make a part of your tax free personal allowance.
For those on a low wage, people who work part time or those who derive most of their income from the sharing economy, remember that the current personal allowance in the UK is set at £11,500. Any income below this amount is tax free. For those who are on the threshold or earn more than this, income earnt above this amount up to £45,000 is charged at 20 per cent. Your personal allowance may be bigger if you claim the marriage or blind person’s allowance.
Remember to tell the taxman.
Regardless of how much you’re earning, remember to notify HMRC, even if you think you might not have to pay any tax. Income derived from such activities is classed as self-employment and you could get in trouble if you don’t.
If you do need to pay tax, remember you may able to deduct related expenditure. This is achieved when doing your self-assessment, which is based on your profit and loss statement for the year.
Back in March 2016, the then chancellor, George Osborne announced two tax breaks for ‘Micro Entrepreneurs’ in his March budget, worth £1,000 a year. The move, designed to help people making money from activities such as letting out your room, making money online or renting out your parking space, was widely hailed as a boon for those working within the sharing economy. Fast forward to 2017 and these measures were quietly dropped by Theresa May’s government. The take home message here is that it is vital to stay informed. Those who don’t could end up paying more tax than they realise.
Keep meticulous records.
To keep on top of your tax returns, make sure to keep records of everything you earn. For those claiming expenses, be sure to keep proof of these safe so that you can make an accurate self-assessment. In the event you’re audited by the taxman you’ll also be better prepared. If you have a personal computer, consider keeping an electronic log of everything on a spreadsheet. By doing so you can make calculations and will have a better idea of any tax you might be likely to pay.
Consider an accountant.
For those not part of the rent a room scheme or earning a larger income, consider getting an accountant as they will be able to tell you what expenses you can deduct. In addition, those who have to pay VAT or people earning income from multiple sources will have some complicated decisions to make when it comes to paying tax. A good accountant will more than earn their fee in their ability to bring down your tax bill.
It pays to have the right insurance.
Many insurers class sharing economy activities as commercial use and exclude claims regarding this from their cover. If your insurer is happy to cover you, it unlikely their cover will be adequate as their policies were not designed to cover claims as a result of these activities. If you are investigated by HMRC, you could be out of pocket without the money to cover an accountant to defend you. Pikl offers specialist insurance policies specifically designed to cover the sharing economy. If you choose our relevant cover, we can cover the cost of an accountant if you’re investigated by HMRC as a result of sharing economy activities.