As we can see there is much furore around whether the hosts of Airbnb can claim Rent-A-Room relief. I can’t help but think that the company are either handling this very badly, or they are happy with the free publicity in silly season, or are hoping that the ensuing uproar could generate calls for legislative changes making their business model more attractive.
Bear in mind that Revenue issued the new guidance in February to specifically reference the Airbnb model and it was barely mentioned in the press. Now, in August, the traditional press silly season, the story is everywhere.
The company are saying that they have not yet ruled out litigation. So let’s consider what options might they pursue?
As a tech company they are probably uncomfortable with the data protection angle around handing data over to the Irish Fisc. But they are a payment processor. The law allows Revenue to demand details of payments they processed in respect of Irish taxpayers since they have their headquarters here. Our Supreme Court was clear that Irish tax law applies to all companies with their headquarters here, regardless of whether they hold the data here, in Walsh v National Irish Bank.
If they chose to challenge the Revenue use of s891D of the Taxes Consolidation Act to gather the data, Revenue could simply apply to the High court under s902A of that Act for an order forcing them to hand it over. The Supreme Court already ruled in the National Irish Bank case that the comparable court enforcement rules relating to Banks are very broad. That jurisprudence suggests the High Court would grant the order easily.
Our history of massive non-compliance in relation to offshore bank accounts explains why our tax authorities have had draconian data collection rules, the likes of which HMRC are only now seeking, for years. And our Supreme Court is comfortable with them using those rules. I don’t see this avenue as a runner.
It is possible that the avenue for litigation to be pursued is that Revenue have somehow unfairly changed their view on the tax law in this area. Except that they haven’t. Any one who read Tax Briefing 44 which was introduced at the same time as the legislation in 2001 can attest to this. It clearly states that “Rent-a-room relief applies where an individual receives sums in respect of the use, for residential purposes, of a room or rooms in the individual’s sole or main residence.”
It has always been a condition of the relief that the room be used for residential, as distinct from business, or guest accommodation purposes.
Even if you disagree with Revenue’s view of the law, without evidencing that they changed that view, there is no decision for the Court to review.
Revenue updated their guidance to refer to Airbnb as a new phenomenon which could affect many taxpayers. But Revenue are simply treating the Airbnb hosts the same way that they have been treating B&B hosts for years since the rules came in.
I see great difficulty with mounting a challenge here. It is not possible to argue that Revenue’s view is wrong, one must prove that their view changed and there is simply no evidence of this.
Additionally Revenue updated their guidance for this in February. The normal time limits for making a Judicial Review application have passed, and there is no obvious reason why they ought to be extended in this instance since the Revenue guidance has been in the public domain for all affected to see since that time.
Again I don’t see this being a runner.
The Substance of the Tax Rules
It may sound obvious to say, but how income is taxed depends upon what you do to generate that income. And this will depend on the facts.
So the idea that Airbnb can have an opinion from EY and an opinion from a Senior Counsel causes me some concern.
Looking at the Airbnb website, rentals can vary from 1 night to several months. The properties can vary from a room in someone’s house to a self contained Granny flat or even a holiday cottage.
With so many potential fact patterns it is impossible, as a tax adviser, to give any definitive advice as to how the income will be taxed in all cases.
Can any Airbnb host claim Rent-A-Room relief? The answer may actually be yes!
Mary is a widow and lives in a house in Dublin. She advertises a room in her house on a B&B basis on Airbnb. Ideally she wants people who will stay for more than one month. Stephanie from France books the room for the summer from May to September as she is coming to Ireland to take a course. Mary is delighted and stops looking for guests.
It is not definitive, but there is a strong argument that Mary could claim Rent-A Room relief. However, let’s review some of the issues which she must address before she can claim that relief.
Is the income rental income or something else?
The first question to ask is what the source of the income is for tax purposes. The default position tends to be that income from the renting of property is taxed as rental income unless there are some other activities which change its nature.
In this case Mary provides breakfast, cleaning and laundry services which go beyond the mere rental of a property.
The next question to ask is whether those services are merely ancillary to the renting of the room, or whether they go beyond that. If I rent a flat for a year I expect it to be clean when I move in. I expect the landlord to fix a broken lock, or mend a broken boiler. As a result these things are not considered to be additional services above and beyond the renting of the flat; they are part and parcel of renting the flat.
If the flat is part of an apartment block it is to be expected that the landlord will keep the communal areas clean. The cleaning of those communal areas is really just part of renting the flat rather than a distinct service.
In this case, the answer is that Mary’s services including cooking probably go beyond the mere renting of a room.
Mary’s son Daithí registered with Airbnb to let out his flat to Jerome while he was on holidays for three weeks. He left milk, juice, bread and teabags so that Jerome did not have to find a shop on his arrival. He cleaned the flat on his return. These were small matters which were merely ancillary to the provision of the accommodation. All Daithí’s income would likely be taxable as rental income.
If something else, is it trading or “other”?
The next question to ask is whether the income is taxable under Case IV as “other income” or Case I as “trading income”. There are a number of tests but the main one here would be “frequency of transactions” i.e. how often a transaction is repeated.
In this case Mary only has one lodger. There is only one transaction. As a result it is likely that Revenue would accept that the income is not a trade, and is taxable as other income.
But, later transactions can impact on the definition of an earlier transaction for these purposes.
So, if at the end of the summer Mary is happy with the money which she has made and takes in no more lodgers that would be the end of the matter. If, instead, Mary goes on to take in Chloe for one month, Emily for one month, and Elodie for one month it is arguable that all of the activities, including the original rental to Stephanie, are now trading.
Ann, Mary’s neighbour, takes guests for shorter periods and had ten guests stay for periods between one night and one week over the summer period. Ann is clearly trading. For Ann the issue of Rent-A-Room relief can never arise because she is not taxed under the “rents and other income” rules to which that relief can apply.
If the income is “other” what are the Rent-A-Room tests?
- Main Residence
Moving on to the next test, Rent-A-Room relief can apply to rents and other income which arises from letting a room in “your main residence”.
Sinead, Mary’s cousin, has a granny flat over her garage which is not attached to her house, which she rents out to one guest for six months. The Granny flat has its own entrance and kitchen and Sinead provides no other services. The guests rarely enter Sinead’s house, other than for the occasional cup of tea and chat. While Sinead’s income is clearly rental income as she is providing no other services, Rent-A-Room relief cannot apply as she is not renting out a room in her main residence.
If the garage was attached to the house, or the unit was a basement flat in the house albeit self-contained, the relief could be available.
But as Mary is renting out a room in her main residence so the relief may be available.
- Residential Accommodation
The next test which Mary must meet is that the room must be used as “residential accommodation” by Stephanie. There is case law on this point and the Court of Appeal in England & Wales decided that the question of whether the occupation of a property was sufficient to make a person “resident” there for tax purposes was a question of fact and degree in each case. For a person to be “resident” there must be some evidence of permanence, some degree of continuity or expectation of continuity.
Stephanie only plans on being in Ireland for three months. As a university student she is used to living out of a rucksack. The room is entirely suitable for her needs while she is here and she is pleased not to have to move about. The college post her forms to Mary’s house. Her friends call there and sometimes stay for dinner. She purchases an Irish mobile phone which is cheaper than roaming. It is very arguable that she is using the accommodation as residential accommodation in order to qualify for the relief.
Mary told her friends Sorcha & Neil about how she thought Airbnb was brilliant. They decided to try it. They had Jamie and Pippa, a British couple, stay with them for three nights while attending a festival. After Jamie & Pippa left they decided that they didn’t like having strangers in their house and so removed their advertisement. While Sorcha and Neil only had one lodger, and in many other respects were similar to Mary, it is clear that Pippa & Jamie used the accommodation as guest, and not residential, accommodation so there is arguably no question of the relief being available.
The EY view seems to be that the case of Owen v Elliott (H M Inspector of Taxes) is authority for the proposition that “the expression ‘residential accommodation’ does not directly or by association mean premises likely to be occupied as a home. It means living accommodation, by contrast, for example, with office accommodation. I regard as wholly artificial attempts to distinguish between a letting by the owner and a letting to the occupant; and between letting to a lodger and letting to a guest in a board house; and between a letting that is likely to be used by the occupant as his home and one that is not.”
This view is likely to be challenged by Revenue, but in any event a significant number of Airbnb users will fall outside the rules for Rent- Room either by having income which constitutes trading income due to the frequency of hostings, or because the property used is not their main residence.
To suggest that Sorcha & Neil (as the only example I have given exactly on this point, being one or two short term hosting in their main residence) should litigate a point, not just before the Appeals Commissioners, but potentially through the superior courts, given the known strength of Revenue’s views on this matter seems somewhat aggressive. Such litigation could take many years, and if Counsel are to be instructed could cost many multiples of the income likely generated given the required fact pattern.
Generally on the Airbnb model
Mary, depending on what she does after Stephanie leaves, may well qualify for Rent-A-Room relief. But everything about the Airbnb model is stacked against this conclusion. It will be the exception rather than the rule.
A holiday cottage won’t qualify; the space must be in your main residence. Guests staying for short periods of time won’t qualify. Too many guests staying won’t qualify.
If you’re providing meals and have any number of guests Revenue would likely treat you as carrying on a trade. The tax rules would then be the same as they are for B&B owners, or hotels. Even if you only have two or three guests, if you keep advertising and hoping to appeal to more guests this analysis is likely correct.
If the guests are not staying in your house, and you don’t provide meals etc the chances are that the income is rental income. Expenses such as food which is left on the premises on arrival may not be tax deductible, but Revenue are unlikely to challenge this aggressively, especially if that service is advertised as part of the offering.
It is only with a long term rental to just one or two lodgers that the relief is likely to be available. But this is not the Airbnb model. If Stephanie decided to stay on with Mary for a further six months to complete another course, the chances are that she would not book this through Airbnb but would make an agreement directly with Mary. In fact Stephanie probably only booked one month with Mary to begin with via Airbnb to determine if she liked living there and later extended it without the involvement of Airbnb.
Under the Airbnb payments model Stephanie pays Airbnb up front, but Mary is not paid until Stephanie leaves. It therefore makes little sense for Mary to advertise a long term arrangement, which involves her incurring costs of food along the way, via that platform.
The percentage fee arrangements used by many such online sites would tend to encourage users seeking longer term agreements within the Rent-A-Room rules to look elsewhere for their advertising options.
If Stephanie’s friend Amélie decided to come and stay with Mary for six months after Stephanie returned to France she would be unlikely to organise this via Airbnb but by phoning Mary.
So the restrictions inherent to the tax relief would tend to point people for whom the tax relief is important, away from Airbnb, which may provide for monthly rentals, but which any savvy homeowner in need of cash, would eschew in favour of a site which allowed them to be paid on a regular basis for longer term arrangements.
Back to Airbnb “not ruling out litigation”
Even if a significant number of people with Mary’s profile were using Airbnb, it is clear that Airbnb still would not have standing to challenge the actual application of the law. It simply does not affect them.
Airbnb may be prepared to fund some of its hosts’ professional fees. But I doubt this. It seems more likely that the company is not overly upset by the publicity which is being generated once it is seen to be trying to be as helpful as possible. The refusal to confirm that they won’t litigate when there is no obvious basis for them to do so, fits in with this pattern.
In one sense it begs the question why Airbnb have sought an opinion not only from EY, but also from Senior Counsel, in a situation where they cannot litigate. Their hosts who are affected cannot either see the totality of, or rely on, that advice. If that advice is targeted to the many different fact patterns which might arise; it seems unusual that the company would hold it out as supporting the application of Rent-a-Room relief in all scenarios. Yet the company has been very careful not to do this, merely to give the impression of doing this. If you read their statements they have specified that the income should always have been treated as potentially taxable income. A cynic might think that appearing to be helpful while creating no risk for themselves or their advisers is the aim here.
In the interim lots of small taxpayers are in a blind panic, not just Airbnb hosts, but also those who host summer students or operate traditional digs.
It is clear and always has been clear that this relief is designed for those operating digs on a medium to long term basis and Revenue guidance supports this. A person who takes into their home a university student or worker for six months to a year clearly qualifies for the relief. If they take in two they can still qualify but once the rents exceed €12,000 per annum they become taxable on a normal “income less expenses” basis for all of their income.
The family taking in a Spanish student of a similar age to their own children who then use the money to take the whole family to cultural events and encourage their kids to be exposed to a child from a different background for three weeks in the summer are clearly not trading. Nor are they engaged in a letting business since the care of a minor is far more important than the provision of a bed. It is unlikely that Revenue would even seek to tax any small profits which arise as “other income” on the basis that in many cases such arrangements will result in a loss. Any remuneration should therefore be treated as expenses. Just as tax free travel expenses may slightly exceed the actual costs incurred, the same arguments could be made here. In the event that the student missed their flight home, or lost their jacket it is likely any small profit would be wiped out by exceptional child care costs.
By contrast, a person who takes in multiple foreign students, on a short term basis, in a commercial operation, would likely be viewed as trading.
What to do now?
If a person is trading then they are taxable on their profits rather than their revenues. They can claim a deduction for any costs incurred wholly and exclusively for the purposes of the trade. This would include a proportion of their bills, a proportion of their groceries etc. If receipts were not kept, and how many of us keep receipts for a box of tea-bags and a litre of milk, a case can be made to Revenue that if the advertisement stipulated that an Irish breakfast was included that a reasonable cost for the provision of that breakfast was €X. For overheads, if bills weren’t retained, bank statements can be used to evidence the costs.
For a person with a rental business, or an “other income” business, similar rules will apply. Deductions for items not specifically mentioned in the rental agreement may not, however, be allowed. If the advertisement doesn’t mention fresh flowers then the cost of those flowers would not be deductible. If the advertisement mentions basic groceries being available on arrival, the cost of those groceries would be deductible.
Claiming relief for medical expenses and work related expenses which are often otherwise missed by PAYE taxpayers could result in a tax refund for many hosts with low levels of income who don’t normally file returns or claim relief for such allowable expenses.
For 2014, the return is not due until mid November if filed electronically so there is plenty of time. No penalties or interest will apply.
Many may be able to apply to Revenue to have the income coded rather than having to file a return.
If an individual finds that they have an unexpectedly large tax bill which they cannot afford to pay, they should contact Revenue as soon as possible to agree an instalment arrangement. But many smaller scale Airbnb users could find that the scale of the problem has been blown out of all proportion, simply because the story broke during silly season.