Is the landlord correct in charging us Vat on the rents, insurance and service charges?

Is the landlord correct in charging us Vat on...

Didn't find your answer?

We are a private nursery, renting the premises we operate in. The landlord charges us VAT on the rents, insurance and service charges. We queried this with the landlord and he gave us this reply:

"We are VAT registered. We had to pay VAT on the building when we purchased it so have to charge VAT. We will opt out as soon as we are able to."

I should be grateful for guidance with the following:

1. Is the above reasoning correct? Can a new owner charge VAT on rents just because he paid VAT when he bought the property? Presumably the previous owner would have exercised his option to charge VAT. But what happens when he sells the property? Does the 'option to tax' automatically transfer to the new owner, or should the new owner exercise a fresh 'option to tax'?

2. Is there VAT on the Insurance and Service charges?

3. Is there a way to check whether our landlord has indeed filed the 'option to tax'?

4. When does the 20 year limit start? From when when the first owner opts to tax or does each subsequent owner have his own 20 year limit?

Thanks for all replies to this query

Replies (11)

Please login or register to join the discussion.

avatar
By spidersong
07th Jun 2010 10:01

In order:

1) It depends what he means by 'have to charge VAT', if he means 'we were charged VAT and so needed to opt ourselves and charge you VAT' then his reasoning is probably sound. However if he does mean we were charged VAT and so we must automatically charge on, then, as you suspect, he's got it wrong.

An option to tax is specific to the entity that makes it, if a property is sold on with VAT then it's entirely at the purchasers discretion whether they then opt to tax the building or not. If they have not opted then they cannot charge VAT on the rent.

 

2) This one can be more complex, but normally the tenant isn't the insured party, what the landlord's doing is recovering the cost of his insurance premium, his supply to you is still one of leasing a property and so any extra charges for this (no matter how they're calculated or what they're called i.e insurance costs, service charge etc.) will have the same liability of the rental.

If however he merely arranged for insurance in your name, with you as the policy holder, then this would be a disbursement and outside the scope of VAT, this however is very rare in commercial property transactions.

Service charges can be different, sometimes these can be standard rated even if the rest of the rental is exempt. THis depends on whather the service charge is a compulsory part of the rent or is for separately arranged services which would then be taxable at whatever the normal rate for those services is (normally standard rate)

 

3) Ask him for a copy of the confirmation letter from HMRC confirming his option, or for confirmation from his accountant on this. Other than that there's no accesible register held by HMRC as individuals tax affairs are obviously confidential (unless they're sending it out on a CD in which case HMRC tend to just throw them out the front door and hope for the best as far as we can tell).

 

4) Each option starts its own 20 year limit, as per the answer to part 1 an option is individual to the business exercising it and so the timelimit likewise is individual too.

 

Hope this helps.

Thanks (0)
avatar
By spidersong
07th Jun 2010 10:06

Private?

Just as an addendum, I take it 'private nursery' means profit making and privately owned.

If you're a charitable organisation then any options made may disapply if you use the premises for charitable use. Now whilst charging for childcare would normally be business and hence excluded from this there have been a number of cases where childcare charities charging at or below cost to pupils have been viewed by tribunal/courts as not being involved in commercial activity and still using a building charitably. The cases are however fairly specific and don't apply across the board to all charity nurseries and playgroups.

Just though it might be worth mentioning.

Thanks (0)
avatar
By User deleted
07th Jun 2010 10:42

"We will opt out as soon as we are able to"

Not conclusive by any means, but those words certainly imply that an election has been made.

Thanks (0)
avatar
By User deleted
07th Jun 2010 11:36

Thanks Spidersong and Anon

Thanks Spidersong for the very comprehensive reply. Very helpful. This is AW at its best!

Thanks (0)
avatar
By User deleted
07th Jun 2010 11:53

Our status

We are not private in the true sense of the word. We are actually a LTD by guarantee company, but not a charity. There are no shareholders and profits cannot be distributed.

We get the Council grants for the Nursery and charge top up fees for the additional hours.

Could we be treated as a registered charity for the VAT part? seeing that we are LTd by guarantee?

Thanks (0)
avatar
By snorris
07th Jun 2010 14:37

Landlord VAT on Rent and Service Charges

The treatment of VAT in relation to rented commercial premises depends on the status of the building.  In some cases, the landlord may have an 'elected' building which means that it is non-Vat and therefore no Vat can be charged on service charges.  Rent is not the same as service charges for Vat purposes.

The services provided and the landlord's authority to collect for them will be contained in your lease.  It is always worth reviewing the leases to check the covenants.  If you analyse the lease, it is also advisable to analyse the service charge budgets and statements.

Note:  Under the RICS code (Royal Institution of Chartered Surveyors), service charge budgets should be provided in advance of the beginning of the new service charge year and service charge certificates should be presented soon after the end of a year.  When the final quarter service charge demand is presented, unless the collections exactly match the budgeted figures, they should give a balancing charge or balancing credit.

I hope that this is helpful.

 

Kind regards

Steve Norris

BBC Services

Thanks (0)
avatar
By User deleted
09th Jun 2010 10:33

VAT on rent to a nursery

The landlord has the choice of opting to tax the building.  If they do, the VAT charged to them when buying the building is receoverable as input tax through their VAT return.  If they do not, this VAT becoems a cost to them.  If they opt to tax they must then charge VAT on the rent.  They cvan apply to HMRC 20 years after opting for the option top be cancelled from that time.

The rent is deemed to include amounts such as service charges and insurance.  Insurance when supplied to the insured party is exempt from VAT, however in this case I suspect that the landlord is the insured party (building insurance).   As the landlord is very unlikely to be licensed to supply insurance, thge onward charge to the nursery is not itself insurance and therefore not exempt.

You could ask the landlord to give you a copy of their notification to HMRC of the option to tax.  HMRC are unable to help as the information it holds relates to another taxpayer.

Thanks (0)
avatar
By Dave Collier
09th Jun 2010 10:39

Need to be recognised as a charity?

I'm pretty sure you would need to be either Registered with the Charity Commission and or have agreement (and a reference number)

from HMRC that your nursery can be treated as a charity for tax purposes to be treated as a charity for VAT.  What agreement do you have regarding payment of Corporation Tax with HMRC?

Thanks (0)
avatar
By jpcc1
09th Jun 2010 11:11

Can we be treated as a registered charity?

You can only be treated as a registered charity if you register. To do this your objects must be entirely charitable.

If this is the case you are a charity and you must register by law. (See Charity Commission website for details)

Among other considerations if you register is that you would need to ensure that directors / trustees were not paid or that there was a clause in your mem & arts specifically allowing this.

Thanks (0)
avatar
By cswan
16th Jun 2010 09:31

Check your lease

I assume the new owner has taken over the lease from the previous owner, rather than you having signed a new one? If this is the case, then it may well be that the rental clause in your lease stipulates that no VAT will be chargeable for the duration of the lease. Now, I don't suppose this supercedes VAT law, and the requirement to charge VAT if the option to tax has been made, but it would probably constitute a breach of contract and allow you to break the lease if you wished. It could certainly be a strong negotiating point with the new landlord, perhaps to negotiate the rent downwards so the impact of the VAT is not so harsh.

Caroline

Thanks (0)
avatar
By mautzu
31st Aug 2010 13:53

Insurance
Each insurance policy is different.All i know is that a Landlords Insurance policy will cover the building itself with the option of including the contents left within. It depends on contract terms.

Thanks (0)