Election to tax and insurance rent

Election to tax and insurance rent

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I have a client company with a number of rental properties.

On some they have opted to tax and on others they have not.

Under the terms of the rental agreements they charge the tenant for the insurance. My understanding is that the legal form of such charges is that they are considered to be rent even though it is reimbusement of the insurance premium.

On the basis that the legal form is that it is rent I think the client should have charged VAT on the insurance rent for properties where there is an option to tax and not charged it on properties where there is no option to tax.

Do you agree?

The client has not charged VAT on the insurance rent where there is an option to tax.

Thanks
David
David James

Replies (8)

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By SteveReynolds
18th Dec 2006 19:15

Not Rent
I think your client may have a problem. If your client is vat registered and recharges insurance, then from past experience, it is regarded as a supply of a service and so is vatable even though insurance is an exempt supply. The basis is that the exempt supply is only to the policyholder and any recharge then forms a vatable supply.

The option to tax will cover the rent on the property but not any services such as recharged costs, service charges etc.

Also has your client considered the potential problems from having exempt outputs and a partial exemption disallowance of input tax on the non opted properties.

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By neileg
20th Dec 2006 09:47

No, Steve, I still disagree
If you have not opted to tax on a property, any charges you levy in connection with the letting, such as insurance, with be exempt supplies. That's because these charges arise out of the landlords interest in the property, and that's what the option to tax covers. The lease will set out the landlord's authority to make these charges.

If you offer goods or services that are charged outside the provisions of the lease, eg selling furniture to the tenant, then this is not affected by the option to tax status.

In extreme cases, I suppose the lease may not provide for the recharge of something that would normally be included, such as insurance. However, having dealt with commercial property for many years, I've never come across a lease like this. Indeed most leases have very wide recovery provisions.

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By SteveReynolds
19th Dec 2006 16:58

Sorry you are incorrect.
I did not say that the insurance was exempt if the property was not elected to tax, in fact quite the reverse !.

I was making the point that the insurance and other service charges etc are vatable whatever the election status as they are services supplied and so not covered by the rental/property status.

I also was noting that if the landlord had a number of non elected properties then there could be a partial exemption problem due to exempt rents. Nothing to do with service costs and insurance etc

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By User deleted
19th Dec 2006 12:05

Eh?
The option to tax will cover the rent on the property but not any services such as recharged costs, service charges etc.
Sorry, Steve, this is incorrect. The VAT status of the recharges follows the VAT status of the rent. You cannot generate exempt income from a property once you have opted to tax.

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By AnonymousUser
18th Dec 2006 15:28

Correct
If there is VAT on the rent then there is VAt on all services provided by the landlord, including insurance.

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By User deleted
20th Dec 2006 10:25

It good to see some debate
I have not examined the leases in question but it is my understanding that commercial propert leases are normally structured so as to give the standard recharges, such as insurance, the legal status of rent. This is because the landlord has certain powers related to unpaid rent.

In asking the question I was hoping to get confirmation that my general understanding was correct as I would assume that once something has the status of rent it has that status for all purposes, including VAT.

The point that has been raised that you opt to tax a specific interest rather than the rent is interesting. It makes sence as when the landlord sells his interest in an opted property he has to charge VAT. I think.

The problem with debate is that we don't have a conclusion!

Thanks
David

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By rasmith
20th Dec 2006 11:46

The answer ....
Extract from VAT Notice 742 Land & Property

11.7 Other charges made by landlords to tenants
As a landlord you may make charges to your tenants for items other than general services. These charges tend to fall into three categories:
1) further payment for the main supply of accommodation, and follow the liability of that supply (normally exempt, unless you have opted to tax);
2) for supplies other than accommodation (normally standard-rated);
3) disbursements (outside the scope of VAT). Further information on disbursements can be found in Notice 700 The VAT Guide.


11.7.1 Insurance and rates
If you (the landlord) are the policyholder or rateable person, any payment for insurance or rates made by the
tenants is further payment for the main supply of accommodation.

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By AnonymousUser
20th Dec 2006 16:57

What is the problem here?
QUOTE: 11.7.1 Insurance and rates
If you (the landlord) are the policyholder or rateable person, any payment for insurance or rates made by the
tenants is further payment for the main supply of accommodation.

... which is exactly what I said in the first place.


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