Holiday lets what happens if the rules are not complied with

If you own a holiday let, you’re running a business—whether you’ve thought of it that way or not. The good news is that holiday lettings can be a rewarding investment. The less good news is that HMRC has clear rules about how you must report the income and manage your tax affairs. Get it wrong, and the consequences can be surprisingly costly. Let’s walk through what can happen if you don’t comply with the rules.

The income reporting requirement

First things first: any income from holiday lettings must be declared to HMRC. This is not optional. If you let a property for holiday purposes—whether it’s a cottage, a flat, or even a room in your home—the rental income is taxable.

Many people mistakenly believe that holiday lettings sit in a grey area. They don’t. From the moment you start taking bookings and receiving payment, you’re operating a commercial letting business. You must declare this income on your Self Assessment tax return, or within your company accounts if you operate through a limited company.

Failing to report holiday letting income is treated as tax evasion, not merely an oversight. HMRC actively pursues these cases, particularly as they increasingly monitor short-term letting platforms like Airbnb and Booking.com. If you’ve received payments through these channels without declaring them, there’s a clear digital trail.

Penalties and interest

If HMRC discovers unreported holiday letting income, the penalties depend on whether they believe your non-compliance was careless or deliberate.

Careless behaviour (which covers most genuine oversights) attracts a penalty of 0% to 30% of the unpaid tax. On top of this, you’ll owe interest on the unpaid tax at 8% per annum, backdated to the original due date.

Deliberate behaviour—if HMRC suspects you knew better—can result in penalties of 20% to 40% of the unpaid tax, plus the same interest. In serious cases, HMRC may open a criminal investigation, which can lead to prosecution, fines without limit, and even imprisonment.

If you’ve underreported income for multiple years, these penalties and interest charges stack up quickly. A relatively modest underpayment across three years can easily become a four-figure or five-figure bill once penalties and interest are added.

Allowable expenses and record-keeping

Another common pitfall is claiming expenses you’re not entitled to claim, or failing to keep adequate records to support your claims.

You can offset legitimate business expenses against your holiday letting income, reducing your taxable profit. These include mortgage interest (not the capital element), council tax, utilities, insurance, repairs, cleaning, and online platform fees. This is absolutely the right approach and can significantly reduce your tax bill.

However, you must keep receipts and records for all expenses. If you claim £3,000 in cleaning costs but have no invoices, HMRC will disallow those costs. Worse, if you’re making implausibly large claims without evidence, HMRC may view the entire return with suspicion and conduct a full enquiry.

The key principle is this: only claim what you can prove, and only claim what is genuinely business expenditure. Personal expenses—such as your own meals eaten in the property, or general household expenses—cannot be claimed.

The VAT consideration

If your holiday letting income exceeds £85,000 per annum (the VAT threshold for 2024/25), you must register for VAT. Many holiday let owners miss this requirement, particularly if they operate through a platform that handles some aspects of their lettings.

Once registered, you’ll need to account for VAT on your rental income, file returns quarterly, and keep detailed records. There’s an administrative burden, but there’s also the possibility of reclaiming VAT on certain business expenses. Failing to register when required attracts penalties and backdated VAT bills.

Getting it right from the start

The solution is straightforward: treat your holiday letting as the business it is. Record your income promptly, keep organised records of expenses, and file accurate tax returns. If you’re uncertain whether an expense qualifies, ask before you claim it.

If you’ve been running a holiday let for some time without properly reporting it, don’t panic—but do act. The sooner you bring your tax affairs into order, the better. HMRC has disclosure facilities that can reduce penalties if you come forward voluntarily.

For tailored advice, contact Severn Accounting—we’re here to help.