ACROSS THE GLOBE there are protests against the burgeoning sharing economy that is being driven by companies like Uber and Airbnb. There have been legal challenges and even riots in response to the latest example of the creative destruction of capitalism. In Ireland we have just been getting on with it without fuss, right up the point this week when the sacred property market and the reviled taxman became involved.
Revenue got around to contemplating the amount of ordinary households that are renting rooms on Airbnb, and issued a diktat to the company to hand over the details of all their hosts. Investigations concerning tax liabilities from years gone by would soon follow. Ever level-headed media reports spoke of waves of tax audits, big bills and even prosecutions to follow.
Struggling
The whole thing pricked a certain nerve we have in this country where the little people are concerned. Our poor mammies, goes the thinking, are struggling to get by. They’re renting out a lovely room in their well-kept homes to weary travellers, at much more reasonable rates than those big-business hoteliers. Now that bloody taxman, probably at the behest of Phil Hogan himself, is going to come take food from the table to pay more bondholders. And did I mention nobody went to jail over that there recession we had? It’s terdible, Joe.
Airbnb hosts do have a fair point that the guidelines on tax relief for renting a room may not have been as clear as could be. Revenue seem to be acknowledging that and are promising that there will be no prosecutions over arrears, though they’ve not said they’ll lay off chasing for tax they say is owed. The accountants and legal experts at Ernst & Young, and Airbnb themselves, claim that there is nothing in the wording around the tax exemptions for rent-a-room to say it excludes this sort of short term, commercial letting.
This looks like another area where explicit rules, in this case surrounding a tax relief program, have not caught up to technological and economic advancements put forward by Silicon Valley. Revenue will want to close any loopholes, or just affirm that they don’t exist. Populist politicians and commentators have been piling in to say that the little people shouldn’t be targeted for tax at all, and will promise to regulate specific exemptions for folks renting rooms in this way.
Householders
As per usual when it comes to tax reliefs, people are confusing mode and outcome. The €12,000 rent-a-room tax relief, which was raised from €10,000 a year in recent budgets, is not designed to help struggling householders. That it does is a simple, tangible and popular effect that politicians can point to. But householders are just the mode to achieving an outcome: The provision of more rooms available for rent in our highly pressed housing market.
The relief is designed to encourage people to let out spare rooms in their houses that otherwise sit idle. Because of our very low threshold on earnings entering the higher rate of tax, it is likely that most people considering renting a room would think it financially unappetizing if they were only getting half of what they let the room to the tenant for. So the government encourages them to let the room by allowing them to keep all the income tax free, up to the reasonable limit of €1,000 a month that is likely to be reached by people with several spare rooms.
If, as has been suggested, we allow people to avail of this relief for the purpose of short-term commercial letting to tourists and business travellers, we will further screw the property market for students and professionals. If you let a room for between €300-500 per month, it’s effectively €9.86-16.43 a night. The average nightly rate in Dublin for a private room in the college season of October on Airbnb is €54. €30 a night is pretty much the cheapest you want to go.
Professionals and students
If people letting commercially are allowed avail of the tax relief, it makes considerably more economic sense to rent a room in your house on Airbnb than to a long term professional or student tenant. A room that can command €300 long term could net you up to €930 a month on Airbnb. If, however, you’re taxed on that income as normal then you’re looking at getting as little as €446 for renting it commercially. With that premium, you’d have to ask yourself if you’d rather the stability of a long-term tenant. You may not fill the room every night on Airbnb, will have the hassle of advertising it, dealing with enquiries, cleaning and so on. A near-guaranteed tenancy for the college or full year makes a lot more sense.
I’m rarely one to sing the praises of any tax, but in this case we must use the tool of the rent-a-room scheme appropriately to the problem we are most looking to fix. Tax reliefs distort the market by encouraging people to do one thing over another. If we have a housing crisis for students and professionals, we want the tax relief for letting rooms to alleviate that problem first and foremost.
Allowing that relief to be used to rent rooms at higher rates to tourists is counterproductive in the extreme.
Aaron McKenna is a businessman and columnist for TheJournal.ie. You can follow him on Twitter here.
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