Running a Furnished Holiday Let: Tax, VAT and Expenses Explained

Owning a furnished holiday let can be a fantastic investment. Whether you're welcoming guests through Airbnb, Booking.com or your own website, holiday accommodation can provide an additional income stream and, if done well, a rewarding business. It's also an area that's often misunderstood:

• What expenses can you claim?

• Do you need to register for VAT?

• Can you reclaim the VAT on refurbishing the property?

• And didn't the tax rules change recently?

Let's look at what every holiday let owner should know.

The rules have changed

If you've owned a holiday let for a while, you may remember the old Furnished Holiday Lettings (FHL) tax regime. From April 2025, those special tax rules were abolished, meaning holiday lets are now generally taxed in line with other residential property businesses. Many of the tax advantages previously available have been removed, although the way holiday accommodation is run hasn't changed. That means if you're reading older articles online, there's a good chance they're now out of date.

Does Airbnb income need declaring?

In a word... Yes! Whether your bookings come from:

• Airbnb

• Booking.com

• Sykes Cottages

• Your own website

• Direct bookings

…the income still needs to be declared to HMRC.

The booking platform doesn't change your tax obligations. In fact, online platforms now share increasing amounts of information with tax authorities, so it's more important than ever to keep accurate records of your income and expenses.

What expenses can you claim?

The good news is that many of the everyday running costs of a holiday let remain allowable. Typical expenses include:

• Cleaning costs

• Laundry services

• Welcome packs

• Toiletries

• Utilities

• Broadband

• TV licences for guest use

• Insurance

• Booking platform commissions

• Advertising and marketing

• Gardening

• Window cleaning

• General repairs and maintenance

• Accountancy and bookkeeping fees

These are all costs incurred in running the business and are generally allowable when calculating your taxable profits.

Repairs or improvements?

This is one of the biggest areas of confusion. Not every pound you spend improving a property is immediately tax deductible.

Example 1 – Repair

The boiler stops working. You replace it with a modern equivalent. Generally, that's a repair.

The cost is usually treated as a revenue expense.

Example 2 – Improvement

You decide to knock two small bedrooms into one luxury suite with an en-suite bathroom. That's improving the property rather than repairing it. The cost is usually capital expenditure. That means you won't normally deduct it from your rental income in the same way as everyday running costs.

A good rule of thumb is: Repairs maintain and improvements enhance. The tax treatment often follows that distinction.

What about refurbishing a property before you start letting it?

This catches out lots of new holiday let owners. Imagine you've just bought a cottage that needs some work before you can welcome your first guests. You spend money on:

• Decorating throughout

• Replacing flooring

• Installing a new kitchen

• Buying furniture

• New beds

• New appliances

Can you claim it all? Unfortunately, not necessarily. Some costs may be treated as repairs while others may be capital improvements. The timing also matters. Work carried out before the property is first available to let may be treated differently depending on the nature of the expenditure.

This is one area where taking advice before starting a major refurbishment can make a significant difference.

Furniture and household items

Since the abolition of the FHL regime, new expenditure on furniture, furnishings and fixtures no longer qualifies for the previous capital allowances treatment. Instead, the normal property business rules apply, including Replacement of Domestic Items Relief where the conditions are met. Existing capital allowance pools from before the rule changes may continue to qualify for writing-down allowances.

In simple terms, replacing an existing bed, sofa or dining table is treated differently from buying everything for a brand-new property.

VAT – one of the biggest surprises

Many people assume holiday accommodation is VAT exempt because it's property. It isn't.

Unlike most long-term residential lettings, holiday accommodation is generally standard-rated for VAT. The abolition of the FHL tax regime did not change the VAT rules. That means if your taxable turnover exceeds the VAT registration threshold, you'll normally need to register for VAT.

Once registered, you'll generally charge VAT on your accommodation. You may also be able to reclaim VAT on qualifying business purchases, subject to the normal VAT rules.

Can you reclaim VAT during a refurbishment?

Potentially, yes. If you're VAT registered and the refurbishment costs relate to your taxable holiday letting business, you may be able to recover VAT on qualifying expenditure. However, not every invoice will be reclaimable. Some costs may relate to capital items. Others may contain private use and some may not carry VAT at all. Keeping every VAT invoice during a refurbishment is incredibly important. That little pile of paperwork could be worth thousands of pounds.

Booking platform fees

If you use platforms such as:

• Airbnb

• Booking.com

...don't forget about their fees.

Commission charged by booking platforms is generally a business expense. However, depending on the platform and where it's established, the VAT treatment can vary, particularly where services are supplied from outside the UK. It's worth making sure these charges are being recorded correctly in your bookkeeping.

Personal use matters

Here's a scenario we see quite regularly. A holiday cottage isn't booked for a weekend. The owner decides to stay there themselves. Seems harmless enough but personal use can affect both the records you need to keep and, in some circumstances, the tax treatment of expenses. The more personal use there is, the more important it becomes to keep clear records separating business and private use.

While spending a weekend "testing the mattresses" might sound like a convincing business reason...

HMRC may not be quite so easily persuaded.

Common mistakes we see around furnished holiday lets

Holiday lets can involve lots of moving parts, so it's easy to make mistakes. Some of the most common include:

• Assuming all refurbishment costs are immediately deductible.

• Treating improvements as repairs.

• Forgetting to declare Airbnb or Booking.com income.

• Not keeping VAT invoices during refurbishment.

• Ignoring booking platform fees.

• Mixing private use with business use.

• Assuming holiday accommodation is VAT exempt.

Most of these problems are avoidable with good records and a little planning.

A practical example

Let's imagine Sarah buys a cottage to turn into a holiday let. Before opening, she:

• Repaints every room.

• Replaces worn carpets.

• Installs a luxury new kitchen.

• Buys beds, sofas and dining furniture.

• Pays Airbnb commission on her first bookings.

• Registers for VAT because her taxable turnover exceeds the registration threshold.

Each of those costs could have a different tax or VAT treatment. Some may be repairs. Some may be capital expenditure. Some may carry recoverable VAT. Some may not. That's why it's so important not to assume every invoice is treated in exactly the same way.

Final thoughts

Running a furnished holiday let can be hugely rewarding, but it brings responsibilities that go far beyond handing over the keys and leaving a welcome basket. Understanding how income is taxed, knowing which expenses are allowable, keeping good records and getting the VAT treatment right can save both money and stress.

The abolition of the Furnished Holiday Let tax regime has certainly changed the landscape, but it hasn't changed the importance of careful bookkeeping and understanding the rules. Whether your guests find you through Airbnb, Booking.com or your own website, good financial management is just as important as five-star reviews. After all, it's much easier to enjoy reading glowing guest feedback when you're confident the bookkeeping is just as tidy as the freshly made beds.