Compliance and Tax Investigation

What are the Tax Implications of Renting out a Room through Airbnb?

Renting out a Room through Airbnb

Letting out a room through Airbnb will bag you £1,000 tax free from April 2017. For anyone who is eligible this can be added to the £7,500 tax-free bonus under the Rent a Room scheme. Making the “sharing economy” part of the national economy while also exploiting technology to both promote the economy and in some ways police the collection of taxes is something quite new. It is all very attractive to build multiple income streams, but you must stay on top of what you earn and declare all income that is not already taxed at source.

Tax breaks in the sharing economy for micro-entrepreneurs

In what turned out to be his final budget, Chancellor George Osborne announced that he was offering “a tax break for the digital age [from which] at least half a million people will benefit”, he was providing “micro-entrepreneurs” with an opportunity to benefit from sharing economy platforms like Airbnb to earn a little extra income tax-free.

From April 2017, taxpayers who let out a room in their home to Airbnb travellers can earn the first £1,000 tax free per year. This rule stretches to other services and products on other sharing economy platforms such as TaskRabbit.com ‒ an online marketplace where people can outsource little jobs (such as running to the corner shop) by connecting with others nearby ‒ or to BlaBlaCar, which connects visitors to international cities empty seats in cars.

Winners and losers

The fact that the tax cuts for micro-entrepreneurs came alongside a clamp down on buy-to-let landlords was seen as hitting out at an established and “safe” section of the UK economy while at the same time giving a break to a new, some would say more risky part of the economy, prompting some disgruntled criticism. From the point of view of an accountant, if there are winners then there must always be losers, and whether you agree or disagree, the rules are the rules and you have to learn to live and work within and around them.

Over the threshold

Airbnb was launched in San Francisco in 2008 to link holidaymakers with householders who have a spare room or a whole property available to accommodate visitors. Certainly, Airbnb can facilitate the market in affordable holiday accommodation and help people build multiple incomes streams, but it will not protect anyone wishing to hide income from the tax authorities.

If you take into consideration that the average cost of an Airbnb room for two people in Britain is £80 per week, you need only rent out a room like this for 12.5 weeks in a single tax year before you reach your tax-free threshold of £1,000. After that, you must pay the normal income tax rate on this and all other income not already taxed at source.

Future monitoring of the sharing economy

The thing is this: while technology is great at bringing together market need with market supply and providing opportunities, at the same time it makes people and their additional earnings potentially quite easy to monitor.

In August 2015, the media reported that Airbnb had agreed to supply Irish tax officials with information to ensure taxpayers pay the correct rate of tax on income earned that is not taxed at source. As Airbnb’s global headquarters is based in Ireland it must comply, just as it is obliged to share user data with the Internal Revenue Service in the United States where it is based.

What lies in store for UK taxpayers?

Airbnb is adamant that it has no plans to hand over user details to HMRC, though it is surely only a matter of time before it must. HMRC is already applying pressure as part of its crackdown on the “hidden economy” and has vowed to target “business intermediaries” that facilitate online transactions. This could see firms such as Airbnb all but forced to release information on the income of anyone registered with them who is renting out property in the UK.

HMRC’s message is very clear, a spokesperson said, “We want businesses to pay their fair share and ensure legitimate traders are not left struggling to compete against tax cheats. That’s why we’re consulting on updating HMRC’s existing data-collection powers for the digital age.”

Anyone who already or is planning to rent out rooms via Airbnb to holidaymakers should be aware of the potential tax liability in order to avoid the possibility of penalties for non-compliance. For those who doubt HMRC’s data-mining capability, power to enforce the law, or investment in digital infrastructure, may we politely suggest you.

About the Author:

Sumit Agarwal
, A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.