The UK tax authorities are taking action against owners of holiday homes

HM Revenue & Customs has launched a crackdown on the booming short-term rental market by initially targeting around 1,000 property owners it suspects have not paid enough tax.

Based on information from online booking platforms such as Airbnb, the UK Inland Revenue is sending its first so-called ‘nudge’ letters this month to those it believes have under-reported rental income on their self-assessment tax returns. Recipients of the letters were given 30 days to respond or risk a formal investigation into their tax affairs.

According to HMRC’s investigation, the holiday letting market has grown rapidly in recent years, helped by the preferential taxation of short-term lettings compared to traditional lettings.

Around 127,000 individuals in Great Britain declared ownership of a furnished holiday rental business in the 2019-2020 tax year for which data is available in their latest tax return.

Airbnb does not provide a geographic breakdown of rentals by country, but a 2020 analysis by the Guardian showed that active listings in the UK jumped from 76,000 to 257,000 between April 2016 and January 2020. annually.

“While there are always exceptions, I think the tax lost from short-term rentals is more accidental than intentional,” said Stefanie Tremain, a partner at accounting firm Blick Rothenberg.

He added that the wealth income system was “very complex after years of legislative changes” and that HMRC would not accept ignorance of the rules as an excuse.

David Fell, senior analyst at real estate agency Hamptons International, said some traditional rental investors have moved to vacation rentals because of their “better tax treatment.”

Contrary to the rules for longer-term lettings, owners of properties designated as holiday homes can enjoy benefits, including full income tax relief when deducting mortgage interest and lower capital gains tax after they are sold.

Chris Etherington, a partner at accountancy firm RSM, said that following the initial campaign, the tax authority could start looking at whether furnished holiday lettings “meet the strict letting criteria”.

The November report of the Tax Simplification Office – which was published shortly before the termination of the legislative body – called on ministers to review the sector’s complex tax system.

HMRC does not have an estimate of how much tax is not paid on the short-term rental market, but said it is working with online rental platforms to “get a better understanding of the sector and who is operating in it”.

Last summer, the government initiated a consultation on the introduction of a national register of short-term rentals, which can help tax collection.

HMRC described the push letters as “routine activity” and added: “We believe our customers want to pay the right amount of tax. . . we’re taking steps to make it as easy as possible for people to get their taxes right.”