Letting agents charging VAT on disbursements

Letting agents charging VAT on disbursements

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I have just taken on a letting agent client

I noticed them charging VAT to landlords on plumbing costs, Tenancy Deposit Scheme Fees and Gas Safety Certificate etc.

Aren't these disbursements that the letting agent is paying these amounts on behalf of the landlord as per HMRC VAT notice 700 ?

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ghm
By TaxTeddy
03rd Nov 2014 15:04

Not disbursements?

I think the key area where this type of expense fails to be a disbursement is that it fails one of HMRC's tests, namely "...it was your customer’s responsibility to pay for the goods or services, not yours".

If a letting agent arranged for a plumber but then failed to pay I would expect the plumber to sue the letting agent, not the landlord.

So, on that basis I think HMRC would not accept these costs as disbursements.

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By newmoon
03rd Nov 2014 15:24

Usually they are paid from a 'client account'

From my experience letting agents should operate a client type of bank account and accounting system. Since 2007 there is a Tenancy Deposit Protection Scheme https://www.gov.uk/tenancy-deposit-protection/overview

So the Letting Agent is acting as agent when arranging repairs and maintenance and the work is being done as agent for the landlord, and paid for by the landlord as a deduction from rents received by the agent on behalf of the landlord.

As such the letting agent does not charge VAT if the maintenance firm is not VAT registered, and likewise the letting agent does not reclaim VAT if the maintenance firm is VAT registered.

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Replying to Matrix:
By The VAT Doctor
03rd Nov 2014 22:45

agree

newmoon wrote:

From my experience letting agents should operate a client type of bank account and accounting system. Since 2007 there is a Tenancy Deposit Protection Scheme https://www.gov.uk/tenancy-deposit-protection/overview

So the Letting Agent is acting as agent when arranging repairs and maintenance and the work is being done as agent for the landlord, and paid for by the landlord as a deduction from rents received by the agent on behalf of the landlord.

As such the letting agent does not charge VAT if the maintenance firm is not VAT registered, and likewise the letting agent does not reclaim VAT if the maintenance firm is VAT registered.

I agree with this.  Many tradesmen will not be registered so better for the landlord not to pass on VAT.

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By User deleted
03rd Nov 2014 16:39

Most of the letting agents ...

... my clients use operate an imprest type system, so they will hold between £250 and £500 back from rent receipts which they use to disburse such minor repairs, and then top up the float from the next rent receipt back to the agreed level. 

If they know there is a bill due that exceeds the float they request funds up front to defray this.

 

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paddle steamer
By DJKL
03rd Nov 2014 16:56

Charge gross cost

 

If the agent is not in the business themselves of providing gas safety checks, other maintenance costs etc. they are not making the supply . The the norm would  be to  reduce the payment of rent remitted to Landlord by the gross cost, detailing the gross deduction on the statement. The only vat the agent normally details to the Landlord is the vat on his/her own fee for services supplied to the Landlord.

Some agents will forward to the Landlord copies of the invoices settled, though this is not always the case. It is very unlikely the landlord can recoup vat on any of the costs anyway, the only time I have heard of this possibly being an issue is re serviced apartments which are more akin to hotel operations, however operators of these types of operations ( A growth business at the moment, it seems) tend to not use conventional agents for their lettings/management.

 

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By Sheepy306
03rd Nov 2014 21:44

@ DJKL

An example of where a residential landlord could recover the VAT on repairs and maintenance etc is if they have another self-employed trade which is VAT registered.

The rental income from the property would be VAT exempt, which means he enters the world of partial exemption (on the grounds that as an individual he receives some VATable income from his other trade and some exempt income from his property). Partial exemption calculations get a little complex but if the amount of input VAT is less than £7,500 per annum then there is no need for such calculations to be undertaken, the input VAT can be claimed in full.

A useful thing to know, and which may be relevant to a handful of clients.

Incidentally, the lettings agents that I deal with tend not to hold a 'reserve' on behalf of the client. They do however tend to instruct their preferred plumber/electrician etc and that tradesman is normally happy to wait until the end of the month when the letting agent receives the rent from the tenant, pays over the disbursement to the tradesman, and then sends the balance to the landlord. Presumably the tradesman gets sufficient business from the agents to justify the credit period given. The exception to this I find is where the agent is dealing with a professional landlord with a number of properties, he does then tend to hold a small balance back. Just my experience.

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Replying to DJKL:
paddle steamer
By DJKL
03rd Nov 2014 21:52

@Sheepy306- Your point

Sheepy306 wrote:

An example of where a residential landlord could recover the VAT on repairs and maintenance etc is if they have another self-employed trade which is VAT registered.

The rental income from the property would be VAT exempt, which means he enters the world of partial exemption (on the grounds that as an individual he receives some VATable income from his other trade and some exempt income from his property). Partial exemption calculations get a little complex but if the amount of input VAT is less than £7,500 per annum then there is no need for such calculations to be undertaken, the input VAT can be claimed in full.

A useful thing to know, and which may be relevant to a handful of clients.

Incidentally, the lettings agents that I deal with tend not to hold a 'reserve' on behalf of the client. They do however tend to instruct their preferred plumber/electrician etc and that tradesman is normally happy to wait until the end of the month when the letting agent receives the rent from the tenant, pays over the disbursement to the tradesman, and then sends the balance to the landlord. Presumably the tradesman gets sufficient business from the agents to justify the credit period given. The exception to this I find is where the agent is dealing with a professional landlord with a number of properties, he does then tend to hold a small balance back. Just my experience.

That is interesting, did not appreciate the point before, thanks.

Would I be correct in thinking that where input vat> £7,500, input vat would be blocked on those costs directly attributable to the exempt letting and it would in the main be input vat on overheads that would be subject to claim albeit under the partial exemption rules?

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By Jim100
03rd Nov 2014 23:23

Thanks you all for taking the time to respond.  I appreciate it is not straightforward and more to it than meets the eye.

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By Joyce Annand
21st Sep 2019 19:32

I would agree with a lot of the comments but having recently taken on a letting agent client, I checked with HMRC relating to charging vat on property repairs organised for landlords. The Letting Agent does not add anything to charges and most of the contractors are not vat registered but HMRC have indicated that since the Letting Agent organised the work, this must be included in their turnover and vat must be charged on the repair

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Replying to Joyce Annand:
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By newmoon
23rd Sep 2019 09:10

Hello Joyce
Your post has dug up a thread from nearly six years ago.
However I don't think the situation has changed. If the letting agent is operating a Trust type account for it's landlord clients (which it should be doing) then the agents is acting as agent!
The job of agents is to arrange matters on behalf of their clients, not act as principal.
If the advice received from HMRC was via the phone line I would go back and ask again and explain the situation, or write to HMRC for a ruling.
Estate Agents don't put house sales they arrange through their accounts, which they would need to do based on this advice.

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By The VAT Doctor
23rd Sep 2019 10:59

Interesting to see this pop up again. I agree, there should be no VAT if the agent is...an agent.

However, I worry that the quite recent Brabners decision and related action from HMRC may be leading HMRC to come to some odd conclusions.

In Brabners, it was decided that search fees failed the basic disbursement test in that the solicitor used the results as part of their advice.

Are HMRC taking a quite literal approach to the disbursement rules arguing that if an agent does more than merely pay for a supply to the landlord, that is enough to fail the disbursement rules and renders the recharge as part of the agents services. Such as the agent instructing the contractor.

This seems to prevent an agent being...an agent.

Worrying

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