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Complete Guide to Serviced Accommodation: Strategies & Tax Tips

Published by UK Property Accountants
Published Date: April 17, 2024

Serviced accommodation is a relatively new strategy in the real estate industry that involves letting out a property for a short term to guests rather than tenants, usually by night or for a period shorter than normal tenancy. Serviced accommodation, which includes fully furnished properties that are available for both short-term and long-term stays, is gradually becoming popular among tourists, travellers, and people looking to relocate themselves..

In the UK, property owners let out their property using various platforms like Airbnb, booking.com and Expedia.co.uk on a short-term basis to earn extra income.

Differences Between Serviced Accommodation and the Hotel Sector

Serviced accommodation includes serviced apartments, farm guesthouses, studio suites, serviced apartments and many more. Serviced accommodations are fully furnished apartments or houses that offer hotel-like amenities such as housekeeping and concierge service. Serviced accommodations offer whole apartments and houses, so you're not confined to just one room.

Meanwhile, a hotel is an establishment that provides lodging and usually meals, entertainment, and various personal services for the public.

Features

Serviced Accommodation

Hotel

Space

Entire apartments or houses

Designed room

Kitchen

Equipped personal kitchen

No personal kitchen

Budget

Relatively cheaper

Relatively expensive, especially for extended stays

Meals

Self-catering

Restaurant or room service

Why Visitors Choose Serviced Accommodation?

People tend to pay more for convenient use of facilities. Serviced accommodations are cost-effective for longer stays and provide a home-like experience. Serviced accommodations are ideal for those looking for more privacy and flexibility than a hotel, as you can have the whole apartment or house to yourself. Booking serviced accommodation can be favourable because of the following:

Comfort and Space

Staying at a serviced accommodation is like staying at home. You can enjoy comforts like a sofa or a place to relax. Unlike hotels where you usually get a place to stay and sleep, serviced accommodation can be more comfortable and spacious.

One Place 

Families, especially with children, prefer to stay in one place rather than separate hotel rooms. Not only is this cheaper than booking multiple hotel rooms, but it is also more convenient as they can stay all together and keep an eye on their children.

Cater to Unique Needs

One of the benefits of serviced accommodations is that they can be designed to meet different needs. For example, if someone travels for corporate work for an extended period, they can find a serviced accommodation that suits their needs.

Cooking Facilities 

Unlike hotels, you can get your own kitchen in serviced accommodations that you can use to cook your food. This way, you don't have to eat out every day. This can be helpful for visitors who need to spend a few weeks on their travel. This facility in serviced accommodation can be cost-effective for the majority of travellers.

The Growth of Self-Catering Accommodation

Serviced Accommodation: Strategies

After World War II, holiday camps became an affordable option for family vacations. They offered catered accommodations like high-end hotels, guesthouses, and bed and breakfasts. There was some letting of properties for holidays, but it was limited.

In the 1960s, the holiday landscape diversified and packaged overseas trips began becoming common. At the same time, catered holidays in the UK became more expensive as wage costs increased. These trends continued through the 1970s, and UK holidaymakers also came to have higher expectations of the accommodation that should be available for them – larger spaces, better furnishings, heating, and improved facilities.

Letting agents emerged as intermediaries connecting consumers with holiday accommodation providers. Without the Internet, seasonal catalogues were produced to showcase available properties. These became the established way holidaymakers sourced properties, although repeat customers remained important. Letting agents also set standards for properties they were prepared to let, and holidaymakers came to expect specific standards of properties provided by specific agents.

By the late 1970s, the UK had a well-established self-catering holiday accommodation industry, running alongside hotels, bed and breakfasts, campsites, and caravan parks.

Serviced accommodation has gained popularity outside the UK too. The number of serviced accommodation property units in Europe more than doubled between 2008 to 2016,  from 43,687  to 114,021. In the UK, around 19,000 serviced apartment units were available in 2016.

Different Ways to Set Up Serviced Accommodation

Are you confused about setting up your serviced accommodation business for maximum earnings? We will explore different strategies you can use to set up your serviced accommodation to maximise your profits.

Buying Property to Use It As Serviced Accommodation

As the name suggests, you can buy the property to use it as a serviced accommodation. As it involves a considerable cash outflow, you must be careful while making such a decision. Make sure you select a property in a suitable location that is fit to let it out as a serviced accommodation and property with the possibility of appreciation in value.

You will need to apply for a commercial mortgage to finance serviced accommodation. Before applying for a mortgage, it's crucial to thoroughly assess your financial situation, understand the terms and conditions of the loan, and have a clear business plan in place.

As you own the property, you can take advantage of the property's price appreciation and make changes according to your unique needs and requirements. 

Rent-to-Rent Serviced Accommodation

Serviced Accommodation: Strategies & Tax Tips

Rent-to-Rent serviced accommodation is a business model that involves leasing a property from the owner and then providing the property to visitors at a higher rate. Buying properties with substantial initial capital for the rental business may not be the right choice for everyone, as the payback period for this can be too long.

So, to tackle this and give us the more beneficial choice for the serviced accommodation business, there comes the Rent-to-Rent Serviced Accommodation (R2RSA) business model.

It's one of the most efficient business models because:

  •  It requires a small amount of capital to start.
  •  It may be profitable within a few months if the property choosing decision favours.
  •  It can bring consistent recurring cash flow.

It works on the strategy of 'control rather than ownership'.

Acting As a Middleman

Under this model, you manage someone else's property and charge specific fees based on generated revenue. Property managers generally ask for 15%-20% of the commission for revenue they generate in the serviced accommodation business. It is like co-hosting on Airbnb. You are entrusted with finding guests, advertising, and providing cleaning services. One of the many benefits of this model is that you will not be associated with financial risks. It can be profitable if you have the proper skills to manage the property and know the serviced accommodation business sector.

For Example, 

Lucy owns a property, and you, as a middleman, manage Lucy's property. You charge a fee based on revenue generated by serviced accommodation. If serviced accommodation generates revenue of £1,500 per month and you charge a commission of 20%, you will have an income of £300.  

Choosing the business model that suits your skillset and financial condition would be best. Serviced accommodation has proven to be profitable for a lot of people. Each business model has its advantages and its own set of challenges. You should be ready to navigate these challenges you could face along the way.

Financing

You must apply for a commercial loan in the serviced accommodation sector. You typically get 75% LTV (Loan to Value) of the property's open market value or purchase price. Serviced accommodation mortgage providers will generally accept both leasehold and freehold properties.

Before applying for a mortgage, it's crucial to thoroughly assess your financial situation, understand the terms and conditions of the loan, and have a clear business plan in place. Remember that there are associated costs, including arrangement, broker, valuation, and legal fees. Purchasing or leasing serviced accommodation is likely to attract SDLT. SDLT are payable on the property's purchase price; if you want detailed information about SDLT, you can refer to our guide on SDLT.

OTAs (Online Travel Agencies)/ Booking Channels

OTA is a website that sells travel-related products, including airline tickets, car rentals, cruises, experiences, accommodations and more. Booking platforms link property owners with travellers seeking short-term rentals like serviced accommodation. Widely recognised sites such as booking.com, Airbnb, and VRBO (Vacation Rentals by Owners) enable property owners to showcase their listings online. Travelers, in turn, benefit from the convenience of quickly booking accommodations through these platforms. Each booking platform has distinct features, fee structures, and target audiences. Therefore, selecting a platform that aligns with your property and business goals is essential for effective online presence and successful bookings.

Property Management Systems

A Property Management System (PMS) proves invaluable for property owners and hosts engaged in short-term rentals such as serviced accommodations. Tailored for efficient rental management, a PMS automates various tasks, minimising the time and effort dedicated to property management. It facilitates calendar synchronisation across multiple booking platforms, preventing the risk of double bookings.

Numerous Property Management Systems, including options like Guesty, Lodgify, and Hostfully, are available in the market, each boasting unique features, strengths, and pricing models. When selecting a PMS, assessing your specific needs and exploring options that align with your requirements is crucial.

Tax Implication on Serviced Accommodation

In the UK, serviced accommodation attracts different taxes, such as:

  • VAT
  • Income tax or corporation tax
  • Capital Gains Tax

We will discuss each of these taxes in brief.

VAT

Serviced Accommodation: Strategies & Tax Tips

VAT is an indirect tax charged on customer spending on most goods and services supplied in the UK. It is suffered by the final consumer and is collected by businesses on behalf of HMRC. If the annual turnover from your serviced accommodation business exceeds the VAT threshold (For the Tax Year 2024/25, it is £90,000), you may need to register for VAT. This could affect the prices you charge and the amount of VAT you must account for.

Flat Rate Scheme

Under a Flat Rate Scheme, a business calculates its VAT by applying a flat rate to its total turnover. The flat rate for service accommodation is 10.5% with a 1% discount for the first year. You can't reclaim input VAT for most of the supplies. To register, you must not have a turnover over £150,000. However, this scheme is only temporary, as you need to leave the scheme as soon as your turnover exceeds £230,000. The flat rate scheme is illustrated below:

For Example, 

In the year ended 31 December 2022, Service Ltd has annual sales (standard-rated) of £135,750 and expenses (standard-rated) of £6,750. The VAT liability under the normal method and standard-rated method is illustrated below:

Normal Method

Particulars

Total

Output VAT/(Input VAT)

Output

£135,750

£22,625

Input

£6,750

(£1,125)

VAT payable


£21,500

Flat Rate Scheme

Using a Flat Rate Scheme, Service Ltd has a liability of £14,253 (£135,750 * 10.5%), resulting in a tax saving of £7,247. However, claiming a flat rate scheme may not be beneficial if you have higher standard-rated expenses. For businesses using the Rent-to-Rent model, most of their cost is rent paid to landlords, which is an exempt supply (supplies not subject to VAT), so using a flat rate scheme might benefit them.


Tour Operators Margin Scheme (TOMS)

Serviced accommodation rentals in the UK may fall under TOMS (Tour Operators Margin Scheme) if they offer services catering to travellers and fulfil certain conditions.

If the venture qualifies for TOMS, assessing whether the margin exceeds £90,000 before considering VAT registration is essential.

TOMS is a complex subject and this can save you a lot of money on taxes.

Income Tax and Corporation Tax

Serviced accommodation can be treated both as property income and as trading income. Supplying additional services, including serviced accommodation, is more likely to be treated as trading income. It should be well furnished and readily available for travellers to stay in so that they can be treated as part of trading activity. There are advantages to this being classified as a trading business rather than a property business. Modern serviced accommodations are most likely treated as trading income rather than property income.

You must report the income on your Self-Assessment Tax Return through the SA100 form. If you are running through the company, you should file CT600. When you are running serviced accommodation, it's essential to keep detailed records of all income and expenses related to the property to calculate your tax liability accurately.

Capital Gains Tax

If you own a serviced accommodation property and decide to sell it, you may be subject to Capital Gains Tax on any profits on sale.

However, for the tax year 2023/24, if your property qualifies as an FHL, you may be eligible for certain reliefs like Business Asset Disposal Relief and Roll-over relief that could reduce your CGT liability.

Ways to Improve Serviced Accommodation Business

Improving your serviced accommodation business involves enhancing your operations, customer service, and overall business strategy. Here are some suggestions to help you:

  • Customer Service: You need to respond to inquiries and bookings promptly. Providing customised services based on customer preferences and needs would be best. Also, a feedback system should be implemented to gather insights from guests and use the feedback to make improvements. Further, you can offer exclusive discounts or special packages to returning customers.
  • Technology Integration: Implement a reliable online booking system to simplify the reservation process for guests. Also, consider incorporating smart home technologies for convenience, such as keyless entry and automated climate control.
  • Quality of Service: Ensure that your accommodations are consistently clean and well-maintained. Regular inspections and cleaning schedules are crucial. Consider adding amenities that set you apart, such as complimentary snacks, Wi-Fi, or access to a gym.
  • Marketing: Try using social media platforms to showcase your accommodations, share guest reviews, and engage with your audience. You can also collaborate with local businesses or attractions for cross-promotions.
  • Staff Training: Ensure your staff are well-trained in providing excellent customer service and resolving issues effectively. Equip your staff to handle unexpected situations with professionalism and efficiency.
  • Competitor Analysis: Regularly analyse your competitors to identify areas where you are lagging, which can improve or differentiate your offerings.

Conclusion

Serviced accommodation can be a great source of income if you manage it properly. Taxes can be a complication and a hassle on top of the business problems you face nearly every day; let our experts manage tax complexities so you can focus entirely on the serviced accommodation business and make it profitable.  

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