Airbnb was established in 2008 in San Francisco by three friends who had difficulty affording rent. To solve this, they rented out air mattresses in their living room to people attending a local design conference. That’s how the idea for Airbnb was sparked. Nowadays, it’s not only just extra rooms and air mattresses; hosts have started renting out whole houses and apartments. As a result, Airbnb has grown impressively worldwide and revolutionized the traditional hospitality industry. While there are some concerns, it’s also opened up new possibilities for travellers to explore different places and for hosts to make extra money by sharing their homes. As Airbnb grows and evolves, it will be intriguing to see how it further influences the travel industry and our perceptions of accommodation.

How Airbnb Works

Airbnb is a platform where hosts can rent their properties, and travellers can find and book them. Each booking involves a commission fee – around 3% for hosts and 6-12% for guests. It also offers features like reviews and ratings to foster trust between users. While Airbnb mainly earns through commissions on bookings, it’s also ventured into other sectors like experiences and luxury rentals. The company’s revenue in 2019 was $4.8 billion, increasing from $3.7 billion in 2018.

Airbnb’s Influence in the UK

Airbnb has grown significantly in the UK over recent years. In 2018, there were more than 2.8 million guest arrivals via Airbnb in the UK, which marked a 45% growth from the previous year. As a result, hosts in the UK made a total of £657 million in 2018. 

Airbnb Taxation

There are different types of taxes, including income tax, national insurance contributions, value-added tax (VAT), and council tax. The amount of tax an individual or business pays depends on several factors, including their income, the type of income they receive, and residency status.

How Airbnb income is taxed in the UK

If you are an Airbnb host in the UK, you must pay tax on any income you earn from renting your property. This income is subject to income tax and national insurance contributions, just like any other income. Your tax will depend on your total annual income, with higher earners paying a higher tax rate.

VAT Collection by Airbnb

As a platform that facilitates short-term rentals, Airbnb is responsible for collecting and remitting taxes on its hosts’ behalf. In the UK, Airbnb has an agreement with HMRC to collect and remit VAT on behalf of its hosts. This means that Airbnb adds VAT to the price of each booking, collects the tax, and then remits it to HMRC.

One of the biggest challenges is identifying hosts not registered for VAT. If a host is not registered for VAT, Airbnb cannot collect VAT on their behalf, which means the host is responsible for paying the tax. This has led to accusations that Airbnb is facilitating tax avoidance by its hosts.

Several high-profile cases of Airbnb hosts in the UK have avoided tax. In 2018, it was reported that some hosts were using fake profiles to avoid paying taxes on their rental income. Other hosts have been accused of not declaring their rental income to HMRC or falsely claiming their property is their primary residence to avoid paying council tax. According to a report by the All-Party Parliamentary Group (APPG) on Tourism, Leisure and the Hospitality Industry, tax avoidance by short-term rental hosts in the UK could cost the government up to £1.3 billion per year in lost revenue. 

HMRC’s Crackdown on Airbnb tax evasion

The sharing economy has revolutionized, and this new business model has also given rise to tax evasion, which has prompted HMRC to launch an investigation into Airbnb hosts. The investigation by HMRC aims to identify Airbnb hosts who need to pay the appropriate amount of tax on their rental income. According to HMRC, hosts earning more than £1,000 annually from renting out their properties must register for self-assessment and pay income tax. However, many hosts are not complying with this requirement, which has prompted HMRC to take action.

Methods used by HMRC to identify tax Evaders

HMRC has used various methods to identify tax evaders, including data mining, web scraping, and social media analysis. The tax authority has been using these methods to identify hosts who need to be registered for self-assessment and are not paying their rental income tax. HMRC has also been working with Airbnb to obtain data on hosts renting out their properties.

Penalties for tax evasion

The penalties for tax evasion can be severe, ranging from fines to imprisonment. The severity of the penalty depends on the amount of tax evaded, the length of time the tax has been evaded, and whether the tax evader has made any attempts to conceal their activities. In recent years, HMRC has imposed severe penalties on tax evaders. For instance, a landlord who had failed to declare rental income of over £100,000 was fined £20,000 and ordered to pay back the tax owed. In another case, a property developer who had evaded £2.2 million in tax was sentenced to six years in prison.

The crackdown on Airbnb tax evasion has had a significant impact on hosts who are evading taxes. Many hosts have been hit with large fines and have had to pay back taxes owed. Some hosts have even been forced to sell their properties to pay off their debts.

Airbnb’s Response to the Crackdown

Airbnb has been under scrutiny by HMRC for potential tax evasion by its hosts for long. In response, Airbnb has taken significant steps to cooperate with HMRC, implement policy changes, and educate hosts on their tax obligations.

1. In 2018, Airbnb signed an agreement with HMRC to share data on the earnings of its hosts in the UK. This agreement allows HMRC to identify hosts not paying the appropriate taxes and act against them. 
2. Airbnb has implemented policy changes to prevent tax evasion by its hosts. These changes include requiring hosts to provide their tax identification number and implementing automated tax collection in certain jurisdictions.
3. In the US, Airbnb has implemented automated tax collection in certain jurisdictions, which means that the platform automatically collects and remits taxes on behalf of hosts. This ensures hosts pay appropriate taxes and reduces the risk of tax evasion.

Governments around the world have taken different approaches to Airbnb tax evasion. Some have implemented regulations and taxes targeting Airbnb hosts, while others have taken a more lenient approach.

The Internal Revenue Service (IRS) requires Airbnb hosts to report their rental income on their tax returns in the United States. However, enforcement has been difficult, and many hosts may need to pay the full taxes owed. In France, the government has taxed short-term rentals, including those listed on Airbnb. The tax is based on the number of nights rented and is intended to level the playing field between traditional hotels and Airbnb hosts.

The issue of Airbnb tax evasion is complex and multifaceted. While some public members may support the company’s practices, the hospitality industry and government officials have expressed concerns about the impact on traditional businesses and the tax system’s fairness. As the sharing economy grows, this issue will likely remain a topic of debate and discussion.  If you are a Airbnb Landlord and need help with your tax planning or tax investigation, reach out to our tax advisors for a consultation to determine the most suitable tax planning for your specific needs.