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VAT on rent??

Hi All,

Very simple question (hopefully!) ... Letting agency, VAT registered. Charge landlords VAT on the commission. Company owns some properties (houses and flats) which are rented out to residential clients, thus no VAT is charged to tenants (and no VAT is reclaimed on any expenditure on these). However, one of the offices has multi offices located upstairs and these are rented out to other small local businesses. VAT is not paid on the rent of this building. But because the business is VAT registered and the tenants in this case are commercial, should VAT be getting charged to the commercial tenants?

My gut feel is yes but just need piece of mind!

Thanks guys.

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If in doubt, do what I always do...

...a nd just guess.  Have you ever come across the phrase "option to tax" and wondered what it was all about?

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05th Mar 2012 11:30

George!

George Attazder wrote:

...a nd just guess.  Have you ever come across the phrase "option to tax" and wondered what it was all about?

 

So grumpy!  Do you need a hug?

That said, George makes a valid comment, you need to consider whether an Option to Tax is in place, then that will make the decision clear.

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By blok
05th Mar 2012 11:07

.

Commercial rent is generally exempt unless the owner has opted to tax the property.  You need to determine whether this has been done.

 

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By blok
05th Mar 2012 11:08

.

wrong side of the bed this morning George?

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Why/how?

Is a company, that seems to be making only exempt supplies, VAT registered?

Yes grumpy. Yes wrong side of bed. Yes hug.

Must go write a positive response to HMRC's punishing silly tax agents consultation, or haven't they opened it yet?

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By khalm0
05th Mar 2012 12:12

Lol. OK guys.....

 

The business is not only making exempt supplies as it manages residential properties for landlords, and this is a taxable service. Also income exceeds the threshold. Only part of it is exempt. (Company owned houses renting on residential basis).

So in terms of this option to tax, would this be decided by the landlord who owns the building that the letting agent business is renting? i.e. The landlord not charging the letting agent VAT on their rent, thus he has opted NOT to tax, therefore the letting agent does not need to charge its subletting clients VAT?

 

Or is it a case of the letting agent although is VAT registered decides if it wants to tax the other businesses for the office rent.? And assuming that this would only be beneficial if there were expenditure which includes VAT that they would wish to reclaim back?

 

Apologise if I sound really stupid but it si the first time I have had to consider this and really appreciate your guidance.

 

 

 

 

 

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By DMGbus
05th Mar 2012 12:27

Fee income VATable, rent exempt by default

" Apologise if I sound really stupid but it si the first time I have had to consider this and really appreciate your guidance "

Tax law is complex. Rarely is a tax question stupid, so don't apologise.

Receiving rent as your own income by default is usually VAT exempt UNLESS...

EITHER

(a) Holiday lets

OR

(b) Opted to tax

The "opted to tax" bit means that you specifically chose to apply [and notified HMRC in writing] VAT to commercial rents making the choice either on a building by building basis or a blanket election ("REE") to HMRC.  Unless you did this the rent remains VAT exempt. 

The commission earned for collecting rents is liable to VAT if you are VAT registered.

Next - PARTIAL EXEMPTION RULES...

businesses that are making both exempt (rent) and VATable (commission) supplies are partially exempt and special VAT calculations have to be made to compute how much of the VAT incurred on costs is eligible for reclaim.   Depending upon the figures you might actually qualify to get all of the VAT back that relates to your exempt income (rental income).

.

 

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Now my day's complete

:)

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By khalm0
05th Mar 2012 12:44

Appreciate your response DMGBus. Many thanks.

 

Thde business when calculates VAT returns excludes any spend on the company owned properties, and also excludes any spend on the rented office in question. so although no VAT is being charged to the end client, no VAT is being reclaimed.. so i think I am safe here!

 

One last question, and sorry to be a pain, but why would the company opt to tax? In this case, what would be the benefit?

 

Thanks again.

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05th Mar 2012 13:13

input tax

khalm0 wrote:

One last question, and sorry to be a pain, but why would the company opt to tax? In this case, what would be the benefit?

in order to recover input tax

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By DMGbus
05th Mar 2012 14:04

Reason for option to tax

There is usually only one reason to opt to tax - to be better off VAT wise! (sorry, plus SDLT see point 2 beliow).

Here's some of the examples that I've dealt with over the years...

Buying a property where the seller has opted to tax.  As seller has opted to tax seller has to charge VAT on property to buyer.  If buyer doesn't opt to tax, then buyer incurs VAT as an extra non-recoverable cost.To save stamp duty... the property to be bought has been opted to tax by the seller, so there's VAT on the price.  Stamp duty (SDLT) has to be charged on price inc VAT if VAT is charged.  If the property transfers as a going concern (with benefit of sitting tenant) then can be transferred VAT-free provided that buyer does things at the right time regarding opting to tax.  SDLT on VAT-free price can be a lot less than VAT on VAT inc price.Investor decides to invest in property.  Buys land.  Has offices or factory built on the land.   Can't get VAT back on construction costs, professional fees, etc unless opts to tax.Investor buys a property that will need money spending on it to refurb / get upto standard for letting.   VAT incurred on refurb costs can't be reclaimed unlessa opted to tax.

The above are some "good" points about opting to tax.  Against this weigh up the risk of a future tenant not being able to claim VAT back on the rent or a future property buyer not being able to claim VAT back on the property purchase.

 

Regarding not claiming VAT back on the non-opted to tax properties you're "safe" tax wise, in that most certainly not recovering VAT that you could not recover.    However I do think that it is worth doing the maths to see if some (or all) VAT on property costs could be recovered under partial exemption rules.  If you have an external firm of accountants ask them about this, most firms of accountants have a basic VAT understanding, many will understand partial exemption VAT. 

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By blok
05th Mar 2012 13:49

.

DMGbus wrote:

 If you have an accountant ask them about this, most accountants have a basic VAT understanding, many will understand partial exemption VAT. 

 

But, he is the accountant!

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By khalm0
05th Mar 2012 15:21

Hi guys,

 

Its been a long blog here but I finally got it! many thanks guys for all your help. Really appreciated. (Even you George!)

 

I have not been in practice long and it is good to get the insight of others. Its nice that there are people out there that are willing to share their knowledge with others and maybe one day (not too soon) i would ahve accumulated enough knowledge to pass on to the new rookies!

 

Thanks again! :)

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By neileg
05th Mar 2012 15:32

Nice summary

Good one DMGbus

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By JaniceI
27th Mar 2013 13:06

Extra Complication!

I have just taken on a client who is a franchisee for a property letting agency, all lets are private and therefore do not come under vatable supplies but the management fees applied would. The franchisor is VAT registered and therefore charges VAT on the management fees they charge my client.  The expected total turnover for the year will exceed the threshold for 2013 but the bulk of this will be made up of the non-vatable rent taken. My assumption is that my client will have to register for VAT but under partial exemption - can any either correct me or confirm this is right please?

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