When you receive your salary, you are not worried about paying any further taxes on it as you know tax will have been deducted at source through PAYE. When you run a business, however, where you do not pay tax when the money is received, you have to set aside a budget so that the tax can be paid. Of course, you pay taxes on the profit and not on just the money received, so you must deduct all expenses when you calculate the actual tax and need to take care of Tax Implications of Letting out a room through Airbnb.
The same principle applies to any income you receive from Airbnb. You should definitely make the most of all allowable benefits, reliefs and allowances, but beyond the thresholds of those you should pay tax on all income earned that is not already taxed at source.
As the managing partner of an accountancy firm two things about financial activity stand out for me. First, HMRC is better equipped than ever to uncover disguised income and has increased the tariffs for fines and penalties for avoidance. Second, sussing people out from looking at their transactions whether from bank or credit card statements, document trails, emails, online activity, and so on is easier than you think when you look closely.
Former Chancellor George Osborne announced “a tax break for the digital age [from which] at least half a million people will benefit”. For me, warning bells rang at this statement: clearly, the tax authorities are keen to bring micro-entrepreneurs into the tax system and that means they’re in the spotlight.
From April 2017, users of the UK’s “sharing economy” can earn £1,000 from it tax-free. If you host via Airbnb you can earn £1,000 and if you are eligible, in addition, you can earn up to £7,500 tax-free under the Rent a Room scheme as well. However, at this stage you need to make a choice: whether you want to use the Rent a Room scheme or the actual profit and loss accounts. Whichever scheme results in paying lower taxes is the one you should use, but the Rent a Room scheme and £1,000 relief is worthwhile for most landlords earning modest amounts from rental income. Anyone earning rental income must declare it on a tax return and then claim the exemption under the rent a room scheme.
HMRC: Benchmarking and Data Mining
Airbnb gets a lot of attention because of its popularity. In 2012‒13, HMRC estimated that the “hidden economy” ‒ money earned but not declared for tax purposes ‒ was costing the Exchequer £5.9 billion in lost revenue.
In the same year, the government awarded HMRC more funding to help put a stop to tax avoidance and tax evasion. HMRC’s aim by 2021 is to raise £1 billion extra in tax revenue, which it will do partly through data mining to track down small businesses and micro-entrepreneurs who don’t declare income.
Do I need to pay tax on my income from Airbnb?
In answer to your question: it is a big YES from me! The space to cheat in the big-data economy is getting smaller and smaller and when you’re caught the penalties are getting bigger and bigger. The safest, and believe me, the most lucrative way to go about operating in the sharing economy is to comply fully with the law, and you can do that best by having the right accountant by your side.
If an accountant looks after your affairs and makes sure you pay the right amount of tax on all your income not taxed at source, the possibility of coming a cropper ‒ landing hefty fines and penalties for non-compliance ‒ is exactly nil. I know you might think: “he would say that”, but hiring an accountant to steer you clear and file accurate returns with neither “careless inaccuracies” nor “deliberate error” is definitely the way to go.