Latest / Host Planet: Airbnb, Holiday Let, and Vacation Rental Insights / DAC7 Explained: What Every STR Host and Property Manager Needs to Know
Transcript
- 0:00For DAC 7, it's gig economy income.
- 0:02It's the blind spot. The tax authorities have no way
- 0:04of seeing how much income people are earning on these platforms.
- 0:07But the penalties are quite hefty actually.
- 0:10HMRC is definitely going through a phase from light slaps on the
- 0:14wrist to taking these compliance situations really seriously.
- 0:17What is DAC 7? How does it affect short term
- 0:21rental property managers and what are the penalties for non
- 0:25compliance? Natalie Dowling from Hartford
- 0:28Consultants is the special special guest on today's Host
- 0:31Planet podcast, and she'll be answering all these questions
- 0:34and more on today's show. Natalie, thank you for joining
- 0:42us on the Host Planet podcast. What is DAC 7 and why was it
- 0:47introduced? So DAC 7's full name actually is
- 0:52the model rules for due diligence and reporting for
- 0:55digital platforms in the sharing and gig economy, which is
- 0:59obviously a massive mouthful. And that is why we use DAC 7 to
- 1:02describe to describe it, because there's not even a good acronym
- 1:05out of that, out of that massive title.
- 1:07DAC 7 is actually the name of the EU directive that covers
- 1:10these regulations. So technically it's not what
- 1:13we're under in the UK, it's the EU side of the rules, but it's
- 1:16the easiest thing that's going around for us to call it.
- 1:19The DAC's are the directives for administrative cooperation.
- 1:24And as the name DAC 7 suggests, there are six other directives
- 1:27that proceed it that are all in the same line.
- 1:30These types of regulations, they're called the Automatic
- 1:33Exchange of information. Some people call that AUI, and
- 1:37that doesn't roll off the tongue either.
- 1:40But basically these types of rules have been around for about
- 1:4210 years. They're mainly for financial
- 1:45institutions before this one was released, and they are
- 1:48international information sharing models for tax
- 1:52authorities that close blind spots that the tax authorities
- 1:55might have. So for example, the DAC 2, which
- 1:58is called the CRS, the common reporting standard that makes
- 2:01sure that banks and other financial institutions share
- 2:05information about overseas tax residents on their books.
- 2:08And that information goes to the, to the home state.
- 2:11And then they, the home tax authorities can compare that
- 2:13information to home tax returns and make sure everybody's
- 2:16declaring properly any assets or income they're receiving
- 2:19overseas. Before these regulations, it was
- 2:22quite easy to hide your money overseas and not declare it at
- 2:24home. And so that was the blind spot
- 2:27that's been closed here for tax authorities.
- 2:29Now for DAC 7, it's gig economy. Income is the blind spot.
- 2:33So obviously over the past few years, the websites and apps to
- 2:36generate income are becoming more and more prevalent.
- 2:39And the tax authorities have no way of seeing how much income
- 2:42people are earning on these platforms.
- 2:44And we see in the media loads, you know, people bragging about
- 2:47earning a lot of money using these kind of platforms.
- 2:50So it's kind of gotten nervous on the tax authority side that
- 2:53they're probably not declaring their income the way they should
- 2:56be and paying all the taxes that they should be.
- 2:58So the whole point of these regulations is to, is to get rid
- 3:01of that to, to make it more transparent for tax authorities
- 3:05on, on what kind of income people are earning through the
- 3:07gig economy and make sure they're doing the tax returns
- 3:09correctly. The scope of the regulations
- 3:12themselves is actually enormous. So it's a, the platform is kind
- 3:18of any website or application, any kind of technology really,
- 3:22where a customer, a user can log on and book a service and the
- 3:26service is being provided by somebody that's not working for
- 3:29the platform directly. So a free, a freelancer.
- 3:33The, the activities that are covered for this are one sale of
- 3:37goods. So this is online marketplaces,
- 3:40things like eBay, Etsy, Vinted, where people can independently
- 3:44sell tangible items #2 transportation rental.
- 3:49So that's the hire of any type of movable vehicle without a
- 3:52driver. So cars and vans, but also
- 3:55bikes, boats, planes, scooters, anything like that.
- 3:59Then there's #3 which is personal services.
- 4:02So this by itself is also massive in that it's the
- 4:05provision of any task at the request of the platform user.
- 4:09So for starters, it's transport rental with a driver.
- 4:12So your rideshare apps, your Ubers, your delivery apps, like
- 4:17delivery rooms, stuff like that come under this bit.
- 4:20And then pretty much any service you could think of, like if you
- 4:22can book it on an app. So a gardener, a cleaner,
- 4:24babysitter, an accountant, a graphic designer, a hairdresser,
- 4:28a personal trainer, you know, the list is endless really.
- 4:31So there's a massive amount of activity that's covered by
- 4:33personal services. And then what I've come to here
- 4:36today to talk about with you guys is the rental of a movable
- 4:39property. So that's not just holiday let's
- 4:41either. That covers things like parking
- 4:43spaces, storage units, static boats, anything that you can
- 4:47rent but cannot be moved from its location.
- 4:49OK, real talk now for all you hosts out there, you know that
- 4:52moment. When you guest messages you
- 4:54again with. Hey, what's the Wi-Fi code?
- 4:57Or you're staring at 5 different calendars wondering.
- 5:00If you've accidentally. Double booked the cottage.
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- 5:05That's. Why?
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- 6:02works. Less stress, more bookings
- 6:05sorted with hopefully. And so the hosts and property
- 6:09managers out there who will be listening to this, they'll be in
- 6:13various different situations. Some might just have one rental,
- 6:16some might be renting a room in their own house, others will be
- 6:19much bigger property management companies and agencies who might
- 6:22have 20-50 hundred thousands of rentals.
- 6:26How does it affect the different people in our audience and, and
- 6:30in the STR ecosystem? So obviously the big target
- 6:33platforms are ones like Airbnb and booking.com where there's a
- 6:37massive amount of activity going on on those platforms.
- 6:39And that's, that's kind of why these rules have been built in
- 6:41the 1st place, because the model of those platforms is what other
- 6:45companies are now taking on and, and following through.
- 6:48So it doesn't really matter how big the company is.
- 6:51There's no minimum threshold on this reporting.
- 6:54So even if you're only if you're a company that that runs two or
- 6:57three property rentals, you're still going to be in scope the
- 7:01same way that Airbnb is. If you're running the bookings
- 7:04through a website or application and it's important to say the
- 7:09properties, if the properties are owned directly by you or the
- 7:12company or your company, then that's not reportable.
- 7:16It's only if you use it as third party owners that are renting
- 7:19the properties through your platform.
- 7:22If you run a listing site where you don't actually take the
- 7:25bookings themselves, you just refer on to other other
- 7:28platforms, that's not in scope because you don't have
- 7:30visibility of the income in the bookings.
- 7:33And it's worth saying as well, if you are just an individual
- 7:36sole trader doing this kind of activity, that's also not in
- 7:39scope. It's for it's for legal entities
- 7:41that are running a platform. OK.
- 7:43So very basically then if you're a property management company
- 7:48and you know about the bookings and you know how much rental
- 7:53income is coming in for your clients, that's when you've got
- 7:56to make sure that you're reporting this to the tax
- 7:59authorities. Have I got that right?
- 8:02Yeah, that's basically it. The platform operator, the
- 8:04person that is liable for the regulations and the reporting is
- 8:08the entity that contracts with the sellers or your the the
- 8:11owners in this case. So well, it doesn't matter if
- 8:15you own the technology being used, if you're using third
- 8:17party tech to do it or anything, if you're the entity that makes
- 8:20those contracts with the owners, this is your responsibility to
- 8:22do the reporting. OK, so next step then, how do
- 8:26you do the reporting? What is expected of you?
- 8:31So the kind of the requirements are in two parts.
- 8:34There's the the the data collection, which is called the
- 8:37due diligence part. So that's you need to collect
- 8:39certain pieces of information from your owners, information
- 8:42about the property. And then at the end of each year
- 8:45you collate all that information into an annual return and that
- 8:48needs to be submitted to the tax authorities in terms of the
- 8:51information you need to collect. So for your owner details who
- 8:56are individuals, you'll need their full name, residential
- 8:59address, their date of birth and their tax ID number.
- 9:02In the UK, an individual tax ID number is their National
- 9:05Insurance number and you should be quite specific about that
- 9:09because people can get confused about what ID number you're
- 9:11actually looking for. For entities, it's a little bit
- 9:15easier to kind of check what what you're getting from them or
- 9:17if you've got missing information because most of it
- 9:19should be publicly available. So you've got a company that's
- 9:22registered on your platform, you need their registered name and
- 9:25the registered company address and the company registration
- 9:27number, which you should all be able to find on company's house
- 9:29and make sure that all matches up.
- 9:32If either individual or entity is that registered, you need
- 9:35their VAT number as well, which again, you can check on the HMRC
- 9:38website if that is a valid ID or not.
- 9:41You'll also need the property information, the property being
- 9:44rented, you need the full address and what type of
- 9:46property it is. If it's located someone where
- 9:48there's land registration numbers, you need to collect
- 9:51that as well and you will already be collecting.
- 9:54But what is reportable information, the bank details to
- 9:57where the income is being paid to the owner that that's going
- 9:59to be reported as well. So that's everything you need to
- 10:02collect kind of day, day-to-day as people are registering or
- 10:06from the owners you've already got on the platform.
- 10:09And then at the end of the year. So the reportable period is the
- 10:12calendar year, first of Jan, the 31st of December.
- 10:15And the deadline for reporting is the 31st of January that
- 10:18follows the calendar year. So it's not a very long period
- 10:21of time to get all that data together and get it submitted to
- 10:23HMRC. It's the format for reporting is
- 10:29very specific as well. It's it's a format called XML
- 10:33Extensible Markup Language is the the full of that.
- 10:37And it's like it's very specific how the the the data
- 10:39restructured within it. So you're going to need specific
- 10:42technology for that as well. You'll have to build it or buy
- 10:45it or use a third party company who doesn't manage reporting
- 10:47service. It's not something you can just
- 10:49whack together on your desktop. OK, So next steps then.
- 10:52How do you go about making sure that you've got that technology
- 10:56to report it? And then following on from that,
- 10:59are HMRC, are they contacting companies?
- 11:02Are they telling them that there's going to be a deadline?
- 11:04Are we, are we still in a situation where a lot of
- 11:06companies maybe are just not aware of this?
- 11:10Yeah, definitely. There's not been the best
- 11:12communication from HMRCI have to say, especially like, you know,
- 11:16my company's has been looking at this internationally and we've
- 11:18been dealing with some other tax authorities around the world.
- 11:21And it seems to be a bit more noticeable in other places in
- 11:24the world than than than what's been going on in the UK.
- 11:27There is some information available on the HMRC website,
- 11:29especially stuff you can give to the owners as well to make sure
- 11:32like they know what's going on and, and, and why they're being
- 11:35asked for this information. Because there might be a little
- 11:37bit of push back there. But HMRC have, as I know a
- 11:42couple of people have approached us and say HMRC have contacted
- 11:44us and said we think they think we should be registered as a
- 11:46platform operator. So they're definitely doing a
- 11:49little bit of investigation by themselves.
- 11:52I would not recommend ignoring this.
- 11:54If you think you might be in scope, you really need to go and
- 11:58find out for a fact. And if you are in scope, you
- 12:00need to get registered on the HRC portal as soon as possible.
- 12:04All platforms should have registered whether they had a
- 12:06reporting requirement for 2024 or not, they should have
- 12:09requested were registered by the end of 2024.
- 12:12So if you've missed that, you need to get on with it really
- 12:14quickly. So in relation to the XML side
- 12:18of things, where can property management companies go for help
- 12:22in this area? So it's, I mean, if you've got,
- 12:26if you own your own technology or if you've got clever
- 12:28developers in house, then they should be able to build
- 12:31something that fit for purpose here.
- 12:34You can, if you're not, if you've got clever developers,
- 12:36but they're not sure what to do, you can obviously hire a
- 12:38consultant who can come and guide you on that.
- 12:41There are companies like my own who provide managed reporting
- 12:44services. So we've built the tech already
- 12:46and we do a fully full service where you send us the data, we
- 12:50reformat it and we also submit it to the tax authorities for
- 12:53you. But there are other companies
- 12:55out there that are building technology which you can then
- 12:57plug in to your own system. And so you can do your own
- 13:00reporting and some of the PMS companies as well are starting
- 13:05to build some functionality for this.
- 13:07So there's definitely a couple out there that have already done
- 13:09it. I know there's a couple that are
- 13:11kind of on with it, but you might find if you've got an
- 13:15American PMS system that they're not going to do anything about
- 13:18this because America will not adopt these regulations.
- 13:20It's not going to happen. So as America do, they stick
- 13:24their fingers in their ears about something that doesn't
- 13:26isn't relevant to them, so they won't be interested in in the
- 13:29story of you've got a requirement.
- 13:30You need to be looking for a third party option.
- 13:33If if your PMS is not going to do anything to do with this.
- 13:36I imagine there'll be a few property management companies
- 13:38out there thinking, Oh my goodness, this is the first I've
- 13:41heard about this. What would your top tips and
- 13:44advice be to those people who were just a little bit
- 13:46concerned? Where should they start?
- 13:49So the first thing to do obviously is check whether
- 13:51you're in scope or not. So there's information on the
- 13:54HMRC website like with the detailed definitions and scope.
- 13:58Obviously you can come talk to a consultant like myself.
- 14:01In terms of scoping, I'm doing that free of charge.
- 14:03So if you just want to like kind of a 10 minute chat so we can
- 14:05look at your business model and say, yes, you're definitely in
- 14:07scope or no, you're definitely not in scope.
- 14:12Also, maybe your short term rental trade association is
- 14:16probably going to have some information about this.
- 14:17I've definitely spoken to a few of those and given up some some
- 14:20advice. And also you can speak with HMRC
- 14:24directly. They, they're being reasonably
- 14:27open at this point to kind of go, this is putting people
- 14:30pointing people in the right direction to find the
- 14:32information they need to see if they're in scope or not.
- 14:34So definitely the first thing is scope your business model.
- 14:37Like I said before, this is an international reporting regime.
- 14:40So if you've got properties on the books that are not in the
- 14:42UK, they may also need to be reported either to HMRC or to
- 14:47another overseas tax authority. There are current, the current
- 14:51partners of jurisdictions for HMRC are Bulgaria, Canada,
- 14:56Ireland, Latvia, New Zealand, Spain and Sweden.
- 15:01So any properties that you that your that are on your platform
- 15:04that are in any of those locations can go into your
- 15:06annual HMRC return. If you've got properties in
- 15:10other EU countries that I've not mentioned on that list, then you
- 15:13might need to register as a foreign platform operator with
- 15:16an EU tax authority to report those those properties from the
- 15:21UK. The Irish revenue is the easiest
- 15:22one to do that with the all the guidance and the registration
- 15:26process obviously is all in English.
- 15:28So it's a lot easier to handle that than one of the overseas,
- 15:33the mainland Europe tax authorities.
- 15:35Also all EU reporting is centralized, so you can tunnel
- 15:38anything for all UEU countries through one single EU tax
- 15:41authority. I guess there'll be people out
- 15:43there thinking, does my accountant know about this and
- 15:46is this something that my accountant can deal with?
- 15:49So your accountant might have heard about it, but I've
- 15:52probably gone. That's nothing to do with me
- 15:54because it's not actually about the finances of your firm, which
- 15:58is what accountants deal with. This is about the customers, the
- 16:01users of the platform and that information.
- 16:04So I think, you know, like what I technically specialized in
- 16:09operational tax, that is the, the tax authority regimes that
- 16:13focus on customer data, how that's collected, how that's
- 16:16used, how that's reported rather than a firm's finances, which
- 16:19accountants do. And there's definitely a
- 16:22separation of understanding there.
- 16:24Like you need to kind of front, front facing knowledge of, of
- 16:28what's going on with the customer activity rather than
- 16:30just what's going on on the books behind the scenes.
- 16:34So if your accountant doesn't know about this, I wouldn't
- 16:37blame them for it. And I don't think it's so the
- 16:41type of reporting and all that stuff, it's not things that
- 16:43accountants are used to doing. So accountancy firm is not
- 16:47really where I would be going for advice here.
- 16:49You want more kind of regulatory compliance type firms in terms
- 16:53of the advice and those people out there who perhaps they've
- 16:57got one or two properties that are in their own name, they own
- 17:00them and they put them on the OTAs like Airbnb, booking.com.
- 17:05Maybe they have a direct booking site.
- 17:07They don't need to worry, right? The situation they have is that
- 17:11Airbnb, booking.com, the OTAs, they'll be expected to share the
- 17:15information with the tax authorities.
- 17:16Hey, you know, this person is on our site and this is how much
- 17:19money we send them. So it does depend how you set up
- 17:23with the OTAs. So Airbnb obviously are
- 17:25reporting everything that happens on their books.
- 17:27However, if you as a property management company are
- 17:31registered on Airbnb as the property management company for
- 17:35all your properties that you manage on behalf of other
- 17:38owners, then you still have a reporting requirement because
- 17:42there's another layer to that reporting.
- 17:44You need to say, because Airbnb will report everything that's
- 17:46gone to you and then HMRC, you need to see, OK, well, what have
- 17:49you done with that income? How many owners has that gone
- 17:52to? How is the property split,
- 17:53etcetera. If you are as an individual or
- 17:58as a company, you've got a limited company that owns a
- 18:00couple of properties and they're all yours and you register that
- 18:03company on, on Airbnb, then you don't need to worry.
- 18:05You don't need to do anything else.
- 18:06Airbnb will report that correctly.
- 18:08If as a property management company, you are listing the
- 18:12individual owners details on Airbnb and Airbnb are paying
- 18:16your owners directly, then you don't have a requirement.
- 18:19But if you're receiving the income and splitting it up,
- 18:21paying it down to the owners, then you do have a reporting
- 18:24requirement. It kind of depends where the
- 18:26income is going and then how it's being distributed.
- 18:30These are the key things that the tax authorities want to
- 18:33know. So tell us then, what are the,
- 18:35what are the penalties for getting it wrong?
- 18:38What are the what are the steps that the companies can take to
- 18:42to get ready? Yeah, the penalties are quite
- 18:46hefty, actually. HMRC is definitely going through
- 18:49a phase of transition from kind of like slaps on the wrist to
- 18:54taking these kind of compliance situations really seriously.
- 18:58And digital platforms is one of the first kind of regimes where
- 19:01they've really ramped up the penalties.
- 19:04So there's a series of penalties.
- 19:06They're structured quite specifically.
- 19:08You can get a flat penalty of up to 5000 lbs and an additional
- 19:13£600 per day of continued non compliance for submitting your
- 19:17annual return late. So even one day after the 31st
- 19:21of Jan you could, you could be getting 5000 lbs and then £600
- 19:24per day. That same penalty applies to not
- 19:27providing the information to sellers that you've reported
- 19:30about them. And also if HMRC make an
- 19:32additional data request, sometimes after you've reported,
- 19:34they might send a notice saying actually can you give us some
- 19:36more information about where you've got that income
- 19:39information from or something like that.
- 19:41There'll be a deadline on that if you missed that, it's the
- 19:43same penalty. So being on time is very
- 19:46important. Other penalties are there's one
- 19:49of up to £100 per seller and that is for a failure to apply
- 19:53due diligence procedures and also for inaccurate or
- 19:56incomplete reports. So any missing data on the on on
- 19:59the reports that you file? Now obviously you've only got 5
- 20:03people on the platform, then the maximum penalty you can get
- 20:06there is £500, but at the bigger the platform obviously that can
- 20:10that can compound really quickly.
- 20:11So if you're getting a procedure wrong to do with your due
- 20:14diligence, that penalty could end up being massive because
- 20:17it's going to impact every single seller on your platform.
- 20:20And then there's a couple of kind of afterthought penalties.
- 20:22Maybe there's 1000 lbs for not correctly registering as a
- 20:25platform operator. So even if you don't have a
- 20:27reporting requirement, you still need to go on and register and
- 20:30say I'm excluded from reporting because I don't have any
- 20:32reportable sellers or because no one owns a profit on my platform
- 20:35or whatever your situation is. And then there's another penalty
- 20:39of up to £5000 per year for not complying with the record
- 20:43keeping requirements. So when you collect this
- 20:45information, you need to keep it for a minimum of five years.
- 20:49That's the HMRC requirement because they might inquire about
- 20:52that information up to five years later.
- 20:54If you can't provide them with the information because you
- 20:56deleted it, then you will get £5000 per year you should have
- 20:59kept it and you haven't. At the same time, we should
- 21:01mention when we talk about record keeping requirements,
- 21:03GDPR. So you're now collecting loads
- 21:06of personal information about lots and lots of people and
- 21:09you're sharing that with third parties.
- 21:10You're in GDPR territory. So it's the General Data
- 21:13Protection Regulations. If you haven't got a data
- 21:16protection policy yet, you need to get one straight away.
- 21:19And you need to elect somebody within your organization,
- 21:21somebody quite senior, to be the data controller, which means
- 21:25they're ultimately responsible for making sure that that data
- 21:27is safe and that it's not used for anything you haven't
- 21:30explicitly said it's going to be used for.
- 21:32So you should update your terms and conditions to kind of
- 21:34signpost that and also to say specifically to owners that when
- 21:38they give you this data, you'll keep it safe, but you are going
- 21:41to share it with tax authorities.
- 21:42They need to know that's what you're doing with it.
- 21:44I imagine most of the companies will be GDPR compliant, but
- 21:48definitely worth worth mentioning it.
- 21:51I'm sure there'll be there'll be a few property management
- 21:54companies out there who are a little bit concerned.
- 21:56So first step though, give give Natalie a call.
- 22:00We'll put some, we'll put some links in the show notes to those
- 22:03vital sections of HMRC where people can find out more
- 22:06details. Natalie, thank you so much for
- 22:09joining us and explaining everything about DAC 7.
- 22:12On the Host Planet podcast. You're very welcome, James.
- 22:15Thank you for having me. Great to chat to Natalie Dowling
- 22:17there about all things DAC 7. I hope you found that episode
- 22:21useful. All right, that's it for today's
- 22:23episode. Remember, this podcast is
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- 23:05that's it for today's episode. Until next time, happy hosting.
- 23:14Yeah.