Shop with flat to rent

Shop with flat to rent

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A friend of mine is just about to buy a shop with a flat on top. He will rent out the flat. As the building will be effectively part of the business and the business is VAT registered, will he need to charge output VAT on the rent. And does it make a difference if he is a sole trader or Ltd co??

Thanks in advance for your help :)
Laura Landmark

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By User deleted
10th Jan 2008 10:50

Exempt
If the flat is rented for living in ,then residential rent is always exempt and VAT can never be charged - and any VAT incurred on this part of the business is not recoverable (such as estate agent fees, etc)

If the flat is rented out for business purposes (ie, an accountant or hairdresser) then your friend can 'opt to tax' the flat using form VAT1614 and can then charge VAT on the rental.

But I suspect the flat is a proper living space.

If the shop below is VAT registered and the rental income flows into the business, then the business becomes partially exempt. That means that it needs to perform a partial exemption calculation periodically as it has mixed (taxable + exempt) income. In simple terms, all VAT on expenditure relating directly to the flat are not recoverable and general overheads relating to the shop/flat may need to be apportioned, so if the roof leaks and needs repairing, the invoice cannot be fully recovered until the partial exemption calculation is performed and the recovery percentage is determined. If ithis nput VAT is below £7.5k per year then VAT recovery can take 100%, but the calculation still needs to be done to prove that.

It may be worthwhile considering having the flat rental under a sole tradership and the 'shop' VAT registered, simply to keep the two 'apart' and avoid partial exxemption complications - but would suggest seeking advice from an accountant.

Also consider as a seperate matter - if buying a shop/business is it a Transfer of a Going Concern (thus avoiding SDLT and VAT charges) and also consider if your friend, the new owner, may need to regsiter for VAT (if not already) as the previous shop turnover will be considered in determining when the VAT threshold was exceeded.

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