Charged VAT on sublet by non-registered landlord

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We have a retail business, which we rent by way of a sub-lease. The owner of the building (Head Lease) opted to tax the building and therefore VAT is payable by our direct landlord. Our direct landlord is not VAT-registered, which was missed by our solicitor when we signed the lease. Our lease with the direct landlord refers to the annual rent cost without the VAT element included but later in the contract it states says that we have to pay "as per the terms of the head lease," which apparently includes the VAT element.

I don't understand how this can be the case if our landlord is not VAT registered and therefore hasn't opted to tax the building themselves? Our solicitor said we would be in breach of the lease if we don't pay the VAT element. Can anyone advise please? We haven't been able to claim back any of the VAT on our rent (we are VAT-registered) but feel we should be compensated somewhere for this. 

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By SXGuy
23rd Aug 2020 14:09

If the landlord wants to charge you rent which happens to equal the gross amount then that's up to them. It's not really their issue if you can't claim any vat. And they don't have to be vat registered to charge the gross value. Providing they don't state that there is a vat element to the charge.

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Replying to SXGuy:
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By Bouba
23rd Aug 2020 14:20

My issue is with the fact that our lease contract is for £15k (before vat) but elsewhere in the contract it says we have to pay vat 'as per head lease terms' so we have to pay vat on top of the £15k. It doesn't seem right to me. Or is this an issue I should take up with our solicitor as they didn't do the correct checks when we signed the lease?

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By tom123
23rd Aug 2020 14:26

Your direct landlord is not vat registered, so your rent should not have mentioned vat at all. - ie you should have been given an 'inclusive' figure.

There is an element of 'trapped' vat, of course.

Is your direct landlord not prepared to register himself?

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ALISK
By atleastisoundknowledgable...
23rd Aug 2020 15:43

What does your rental invoice show? £15k +VAT, or just £18k?

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Replying to atleastisoundknowledgable...:
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By lionofludesch
23rd Aug 2020 16:04

As ALISK says, that's a key point.

Sadly, there's some really woolly wording in the contract which is wide open to interpretation.

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Replying to lionofludesch:
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By Bouba
23rd Aug 2020 17:06

So the earlier invoices say "at the rate of £18,000 inclusive of vat per annum", some just say the figure.

We only became aware they were not actually registered after we hit the threshold in our first year and had to register ourselves. When I looked back at the lease information their solicitor wrote "details to follow" on the form regarding vat registration and option to tax but never forwarded anything because they are not registered. Our solicitor didn't chase it up as he assumed they were registered and missed a trick which means we are out of pocket.

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By lionofludesch
23rd Aug 2020 17:21

Quote:

So the earlier invoices say "at the rate of £18,000 inclusive of vat.....

That seems to be out of order. It rather seems that they don't know what they're doing and were corrected at the point where they started quoting a single figure.

How far are you prepared to take this ? Several options are open to you - complain to HMRC, sue your solicitors or move elsewhere for example -but do you want to take them ? If not, you'll just have to suck it up.

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By Paul Crowley
23rd Aug 2020 17:31

Yours was not there when I started my post, but same thoughts.
Solicitors do not understand tax very well, and VAT even worse.

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Replying to lionofludesch:
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By Bouba
23rd Aug 2020 17:56

I do want to do something as I am irritated by the whole thing tbh.

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By lionofludesch
23rd Aug 2020 18:03

Quote:

I do want to do something as I am irritated by the whole thing tbh.

You can get another solicitor on the job but there'll be a cost to that and no certain success.

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Replying to Bouba:
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By Paul Crowley
23rd Aug 2020 17:25

I have a problem with £18,000 vat inclusive as clearly that statement is incorrect, to the point of being deliberately misleading.
Only an entity registered for VAT can charge VAT.
It is not a retail invoice so VAT must be seperaterly identified and the VAT number of entity displayed etc.
Solicitors are required to be insured.

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By Bouba
23rd Aug 2020 17:49

I queried it with our solicitor when it came up and he said that as the head lease had opted to tax the building, and we were bound by the terms of the head lease, we would be in breach of the contract if we refused to pay it, so we have been begrudgingly paying it.

I don't believe that is correct though. Surely the lease is not legal in this respect if our landlords are not VAT-registered and have not opted to tax the building themselves? I guess I'm wondering how is best to try and recover this money - via the solicitor or our landlord. I feel it should be recoverable in some way.

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By lionofludesch
23rd Aug 2020 18:01

Quote:

I queried it with our solicitor when it came up and he said that as the head lease had opted to tax the building, and we were bound by the terms of the head lease, we would be in breach of the contract if we refused to pay it, so we have been begrudgingly paying it.

I don't believe that is correct though. Surely the lease is not legal in this respect if our landlords are not VAT-registered and have not opted to tax the building themselves? I guess I'm wondering how is best to try and recover this money - via the solicitor or our landlord. I feel it should be recoverable in some way.

Depends how you interpret "as per the terms of thed head lease".

I think you have a case. But there will no doubt be other views. Someone is going to be out of pocket to reimburse you and they'll have something to say about it. Again - how far are you prepared to take it ?

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By jonharris999
23rd Aug 2020 18:37

Oh, they are bang to rights when using the phrase "inclusive of VAT". It was ambiguous without that but it isn't ambiguous with that. They can't collect VAT. Pay them £15K and wait for them to sue you. Bet you they won't - they'll just go and register and opt.

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Replying to jonharris999:
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By Bouba
23rd Aug 2020 19:39

They definitely won't register as it affects the other businesses they own - they have said as much when approached. It was after this that they changed the wording on our rent invoices. They believe they are entitled to charge it as they are being charged it themselves and are not making any money but just passing on the costs. Te problem is we can't reclaim it ourselves.

The actual lease we have with them is for the amount without VAT i.e £15k but the VAT is mentioned later on in the contract as all costs per head lease or something so its all a bit confusing, but I just feel its wrong. It sounds like the best route might be to approach the solicitor because this should have been picked up before we signed the lease and we can demonstrate a financial loss.

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By lionofludesch
23rd Aug 2020 19:44

Good luck.

Be prepared for the difficulties ahead.

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Replying to Bouba:
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By Matrix
23rd Aug 2020 21:13

I am not a solicitor but I think they either charge £15k or £15k+VAT. I don’t see how they can charge £18k with no VAT invoice under that contract. If the landlord wanted to charge £18k then why doesn’t it say £18k?

I would also find out the definition of head lease costs. If it is not defined then why not and why does the solicitor not ask the right questions instead of just telling you to pay up.

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By Bouba
23rd Aug 2020 19:41

Thank-you for all your replies, it's very kind of you to spend the time doing so.

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By jonharris999
23rd Aug 2020 21:01

Oh we love a good scrap.

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By SXGuy
23rd Aug 2020 20:30

I'm confused.

You said "The actual lease we have with them is for the amount without VAT i.e £15k" and earlier on in the thread you said that you pay them 18k, but the contract was worded as inclusive of vat.

So, which is it? Do they pay 15k or 18k?

Are you saying that when the contract said inclusive of vat you WERE paying them 18k but after the wording changed the payment changed to 15k?

Exactly what, in simple terms, is the correct history of this, as so far your story seems conflicting.

If originally they said "inclusive of vat" and they weren't vat registered, that may be a case on its own, but you've already admitted that 18k is Inc of vat, so if you've paid 15k in reality, they haven't had the vat part, and it's just badly worded.

If on the other hand they are receiving 18k they are perfectly entitled to, the only issue is the wording of the original sub lease. Nothing stops them charging 18k it's whether what they charged, was what they believed at one point, should include vat.

What I reckon they really said was not that they have to charge vat, but they have to charge the equivalent of 15k plus vat, because they can't recover it themselves.

Unless you are suggesting that, had you not been made to think you could recover the vat on the rent, you would have found somewhere cheaper, then all you have is a badly worded lease as an excuse to pay cheaper rent imo.

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Replying to SXGuy:
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By paulwakefield1
24th Aug 2020 07:49

Quote:

What I reckon they really said was not that they have to charge vat, but they have to charge the equivalent of 15k plus vat, because they can't recover it themselves.

I get the impression this is what they meant to say but failed to do so. It needs someone (a solicitor) to go through the whole lease through to work out what was said (and I have a nasty feeling that even that is not going to be conclusive).

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By Bouba
24th Aug 2020 09:16

The lease deed itself is for £15k, later in the lease contract it says we have to pay all sums as per head lease and the head lease charges VAT as the owner of the building opted to tax it, so therefore we pay the equivalent of £18k, as do our direct landlord.

The quarterly invoices we receive from our direct landlord say " at an annual rent of £18k including VAT"

My issue is with the fact that when the lease was drafted it was incorrectly thought that they were VAT registered and had opted to tax so we would be able to recover the VAT portion ourselves. As they are not, we cannot do this.

My question is about possible ways to recover the VAT we are paying and whether they can legally ask us to pay it if they are not VAT-registered themselves as option to tax has to be done by all parties, not just once at the top of the chain.

My question is also about whether we have a case against our solicitor as he didn't pick this up when we signed the lease and he should have done. I have looked through the paperwork and their solicitor said they would forward information about VAT and Option to Tax but never did.

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By lionofludesch
24th Aug 2020 09:27

".....have to pay all sums as per head lease"

Everything hinges on what this is held to mean.

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Psycho
By Wilson Philips
24th Aug 2020 09:00

You need to run the lease past a solicitor (preferably not the one responsible for drawing up the half-baked document) to establish exactly what your obligations are.

While you might find that it allows the intermediate landlord to charge you a sum equivalent to their non-recoverable VAT the one thing that they cannot do is charge you VAT.

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By Duggimon
24th Aug 2020 09:19

One option would be to pay the £15,000 and offer to pay the £3,000 VAT on receipt of a VAT invoice, which is required if the £3,000 is VAT.

It sounds like the lease is quite specific that the £3,000 is indeed VAT and not simply a passing on of the cost, and to charge you VAT a VAT invoice is required.

If this approach puts you in breach of the lease then there's definitely something wrong with the lease, because requiring a VAT invoice for a payment that is specified as including VAT should not cause an issue. Your statements regarding your solicitor don't give me any confidence in the lease though, I would suggest getting a second opinion on the lease might be a good idea before digging your heels in.

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By Montrose
24th Aug 2020 18:50

Paragraph 2, Schedule 41, Finance Act 2008. will apply to an unregistered trader seeking to charge VAT - who will be liable to a penalty.

You need a competent solicitor!

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