Many people let out their property, either fully or partially, via platforms such as Airbnb and Booking.com, or as short-term lets to businesses. Most people know that there can be tax implications when letting out a property, but many overlook VAT.
In several situations, you as a landlord may actually be liable for VAT on your letting, and if you overlook the VAT rules, it can prove to be a costly mistake. You risk both having to pay back VAT and missing out on deductions if the letting is not handled correctly from the outset.
In this article, we explain when a letting is subject to VAT and what practical steps you need to take if you are approaching the VAT threshold.
The DKK 50,000 threshold determines VAT liability
As a general rule, as a private landlord, you do not need to charge or pay VAT if your annual turnover from letting a house, flat or room does not exceed DKK 50,000 within a 12-month period. And if you remain below this threshold, you are neither required to register for VAT nor obliged to charge VAT.
However, if you own a business that is already registered for VAT and which lets out flats or rooms, you should be aware that the letting activity may be subject to VAT.
Rental of residential property is exempt from VAT
As a general rule, the letting of residential property is exempt from VAT under the VAT Act. This typically applies when letting a year-round residence on standard tenancy terms, or letting a flat or a room for residential purposes.
In these situations, you must not charge VAT on the rent, and in return, you are not entitled to deduct VAT on expenses relating to the VAT-exempt letting.
When does your letting become subject to VAT?
If, as a private individual or a business, you have an annual turnover of more than 50,000 kroner from letting, you may become liable for VAT. This applies in particular when the letting resembles accommodation rather than ordinary residential letting, for example:
- when you let out a room or parts of your home for periods of less than a month
- when the letting resembles hotel or holiday accommodation services, including cleaning, changing of bed linen and some form of reception or guest service
- when you operate a bed and breakfast
The more your letting resembles a hotel, holiday centre or bed and breakfast, the more likely it is that the Danish Tax Agency will classify it as a VAT-liable letting.
What do you need to do if you are liable for VAT?
If all or part of your letting is subject to VAT, you must ensure that you:
- register for VAT and be issued with a VAT number,
- start charging VAT on your rent and issue a correct VAT invoice,
- report and pay VAT to the Danish Tax Agency.
As a VAT-registered tenant, you are also entitled to deduct input VAT on relevant expenses, e.g. cleaning, advertising, furnishings, maintenance, etc., to the extent that they relate to the VAT-liable part of the letting.
If you have both VAT-liable and VAT-exempt lettings during the year, you will, as a general rule, only be entitled to a partial VAT deduction on expenses incurred.
When lettings and private use are combined
If you use the property for both private and letting purposes, the VAT rules can quickly become more complex. In this situation, you may need to:
- allocate expenses between private use, VAT-exempt letting and VAT-liable letting,
- claim VAT deduction only for the portion of the expenses relating to the VAT-liable business.
What began as a good idea for a bit of extra income can potentially turn into a more complicated VAT task.
It is therefore important that the part of the letting that is subject to VAT is handled correctly, so that output VAT is both charged and accounted for, and that you receive the correct VAT deduction on the expenses relating to the VAT-liable letting.
Do you need advice?
Grant Thornton’s VAT experts are on hand to provide you with professional advice to ensure that VAT is calculated and settled correctly in accordance with current rules and practices.
Please contact us if you would like us to help you structure your letting business in the best possible way and make the most of your tax relief options without taking any unnecessary risks with the Danish Tax Agency.
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