disapplication of VAT for building rental

disapplication of VAT for building rental

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I represent a charity that runs a number of pre-schools and based on the charitable practices we have been granted an exemption from VAT permission for building rental.

While this has been a positive outcome and should allow us to focus our income on more direct charitable outcomes, the exemption has caused a level of confusion for the landlord of the building.

We rent a space in a large multi-roomed community building run by the parish council. This building contains a theater, dance studio and is run as a business in the main.

The issue comes with how the parish council applies the VAT exemption as we have received conflicting advice from the HMRC officers that we have spoken to. When we have called them, they have advised that we are able to present the exemption notice and then pay the council the rental rate less VAT. The council then do not make the VAT payment of this value to the HMRC.

The advice given to the council is that they need to calculated the floor area that we use as a proportion of the whole building, calculate the time we are in the building as a proportion of the total use and then remove that percentage from the total that they claim back against their VAT. They have been advised that they should either increase our rental level to balance out the loses that they make; charge us for officer hours required to carry out the monthly calculations; or serve us our notice as the VAT exemption is too difficult to process.

Can anyone either point us to a useful guide to landlords to apply VAT exemption, or clarify which advice we have received is correct?

There is an added complication as a backdated request for 4 years reimbursement is also being requested, however the need to remain in the building is the priority at the moment.

thanks

Replies (3)

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By The VAT Doctor
18th Nov 2014 07:57

Two different problems
I think what the council are referring to is how they calculate how much of the use if the building is exempt from VAT, for VAT recovery purposes.

Your proposal for your rent is correct - pay the VAT exclusive amount. What they are saying though is that, if this arrangement costs them VAT, they may seek to get more from you to compensate.

Local authorities have a special recovery rule and some concessions too that usually means that they do not exceed the threshold, so I would resist this argument. If they insist they will lose money, I'd be happy to help then review their partial exemption status!

Hope this helps.

Thanks (1)
By Steve Kesby
18th Nov 2014 10:41

The parish council...

... have been misadvised by somebody that doesn't know about the special regime applicable to local authorities (a parish council is a local authority).

Lcal authorities (including parish councils) are entitled to recover their input VAT (well it isn't input VAT, but that's another tory) attributable to making non-business supplies (as well as business supplies).

VATA 1994, s. 33 goes on to say that it can also recover the input VAT attributable to making exempt business supplies, provided it is not significant. HMRC regard up to 5% as not being significant.

So if the parish council's exempt supplies do not exceed 5% of its total supplies (non-business, exempt, and taxable), there is no adjustment to be made.

HMRC are not necessarily correct (unless they have read the lease) that the parish council should reduce the rent charged to you by the amount of the VAT.

If the lease is silent on VAT, the rent is the rent, and if it is exempt, they have less VAT to pay to HMRC, but may have a partial exemption position.

If the lease states the rent to be £X plus VAT, where applicable, then HMRC are correct that the rent should be reduced by the VAT.

Thanks (1)
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By spidersong
18th Nov 2014 12:28

'not significant'

...just to expand on Steve's answer, HMRC's test of significance for parish councils (actually all councils, but it tends to be irrelevant for anyone above Parish size) is actually an either/or test, so the VAT incurred by the council will be insignificant if it's either less than 5% of the total VAT they incur OR it's less that £625 per month on average (£7500 per annum). [http://www.hmrc.gov.uk/manuals/pemanual/PE4325.htm]

So if the PC spend apportioned to your occupation (plus any other exempt activities they have) is less than £37,500 of taxable spend in a year then they can get all their VAT back anyway.

On the backdating of the disapplication of their option; you might not be succesful as the law states that to disapply the charity needs to issue a certificate to the landlord (VAT Act 1994, Sch 10, Section 7 (2), and Sch 8, Group 5, Note 12), but it also states that the certificate must be issued before the supply to which the 'relevant charitable purpose' relates has taken place. So a strict reading would say you can only disapply for the future. (See also http://www.hmrc.gov.uk/manuals/vatlpmanual/VATLP22320.htm , which also states that the intention is to be made clear before the supply takes place). If you did inform them your were trying to disapply the option a while ago and have just been arguing over it since then then you can probably backdate to when you first made the Council aware.

Of course as Steve points out this may be irrelevant if the contract for the rent is silent as to VAT.

Thanks (1)