Charging VAT on rentals

Member Since: 18th May 2020
accountant2510
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accountant2510 wrote:

Charging VAT on rentals
Client incorrectly charging VAT on rentals (no opt to tax)

I have a new client (LTD) who had completed their own company accounts and VAT returns. Upon getting to know the client further I have noticed that the client has been charging VAT on all the company’s rental income (for a while) and subsequently recovering the input VAT. The client has not exercised their option to tax against any of these commercial buildings. All the rent relates to commercial buildings.

The client has paid the net VAT over to HMRC each quarter.

Net error will be over £10K.

What would the steps be? Am I right in thinking it would be to disclose this to HMRC (with client permission) via VAT652 and then potentially try a belated opt to tax claim?

I am open to any suggestions.

Any help will be greatly appreciated.

Sounds to me like they have exercised the option to tax. Just they have forgotten to inform HMRC of this.

You can do a belated notification.
https://www.gov.uk/guidance/opting-to-tax-land-and-buildings-notice-742a...

Wrong way round. Try a belated notification first.

Certainly sounds like client has opted to tax the property - evidenced by charging VAT and reclaiming VAT.

Opting to tax is a 2 stage process, you make the decision to opt and then you notify. So where you forget to notify we have two routes. When you charge VAT but don't tell HMRC it is often referred to as a "de facto" option to tax.

1. As Wanderer has posted, submit a VAT1614 option to tax form to the date VAT was first charged, it will be a belated option to tax, HMRC will want proof before accepting the belated notification, they will want to see copy rental invoices with VAT on the invoice, the VAT return analysis showing the VAT going onto the VAT return, possibly bank statements too. HMRC will want this for the earliest date you have records for (you don't need to produce 4+ years of records, just the period you want to opt to tax from.

2. You could take the view that there is no option to tax because it was never notified and if you don't have the evidence to convince HMRC of a belated option then HMRC will likely only allow an option to tax from a current date anyway. So with that logic, it may be possible to unpick things, refund the incorrectly charged VAT to the tenants, pay back to HMRC any input tax reclaimed in error, etc. But check client didn't reclaim VAT on properties when they were purchased, the rental income would then be exempt historically and so client would need partial exemption calculations historically to correct any under/overclaim of input tax, etc.

So it is usually easier to go route 1, confirm the belated option to tax and carry on as before. This sort of issue often comes to ahead when trying to sell the property and the question is asked about if the property is opted or not, your client (seller) will have no proof of option to tax and so will complicate the sales process, whereas decide on opting or not opting now, then come any future sale everyone will know the score.