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Reclaim vat on resid lets - sole trader

Can a some trader reclaim vat on rental expenses residential let

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Client is a vat registered sole trader. Has one residential property let as well. The letting is exempt for VAT purposes. Can he reclaim the vat on the letting expenses; if so should he also put the letting proceeds as sales in his vat return? If this is possible can he adjust previous vat returns to reclaim vat from the past. I initially thought this would not be possible because letting is an investment business not a trade but researching on the internet maybe it is possible?

Thank you

Replies (9)

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By Les Howard
21st Dec 2018 08:59

No. Residential letting is exempt, so you cannot register for VAT, nor claim input tax.

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Replying to leshoward:
By spidersong
21st Dec 2018 09:09

But Les he is already registered for VAT, and possibly making exempt supplies in the course of business.

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By Matrix
21st Dec 2018 09:16

Look into the partial exemption rules, if the amounts are de minimus they can be claimed but an annual calculation is also required. Exempt sales do not go on the VAT return.

This assumes that the sole trader is not on the flat rate scheme - if so then the rent should be included as sales and VAT paid thereon.

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Replying to Matrix:
By spidersong
21st Dec 2018 09:23

Exempt sales do go on the VAT return, only certain Outside the Scope sales would be excluded.

Not that it's normally worth quoting HMRC but here's Section 3.7 from 700/12 Filling in your VAT return:

"Show the total value of all your business sales and other specific outputs but leave out any VAT."

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By arthurallan
21st Dec 2018 15:18

Hopefully this may be quite straightforward.
His sole trader sales are around 60,000 per annum with direct costs and expenses of 30,000. He pays around 1200 VAT per month which has always just been on his ST business. He registered for VAT in January this year.
His rental income is 10,000 with 2,500 of [email protected] and Letting Agents fees on which VAT could be reclaimed.
There don't appear to be many common costs to split.
So do we adjust the Input VAT on the next VAT return for the VAT not claimed since January on rental expenses? How do we adjust the Box 6 & 7 figures for the previous quarters?

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By arthurallan
22nd Dec 2018 09:50

So am I correct that the basic rule is that VAT on costs and expenses that relate directly to the exempt supply (letting) cannot be reclaimed.
VAT on costs and expenses related directly to his sole trader standard rate supplies can be reclaimed.
VAT on costs and expenses that relate to both businesses should be apportioned

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By soundadvice
22nd Dec 2018 09:59

Not quite!! I came across the following explanation from a VAT course

De Minimis Limits
Having explained the rules governing a partly exempt business above, a business may still be treated as fully taxable (and therefore be able to reclaim ALL of the input VAT incurred) if the total amount of the business’ exempt input VAT (pot 2 - totally exempt supplies - & exempt proportion of pot 3 - common costs) is less than:
• £625 per month on average; AND
• Half of the total input tax in the relevant VAT period (and annually)
Annual Adjustment – Don’t get caught out!
At the end of each tax year (either 31 March, 30 April or 31 May – depending on VAT quarter end), an ‘annual adjustment’ calculation must be carried out in order to ensure that the partial exemption calculations described above apply to the business over the entire year. i.e. the residual income apportionment percentage and the de minimis calculation must both be performed over the 12 month period.
If, having re-calculated the business’ partial exemption figures on an annual basis, it turns out in retrospect that the de minimis limit was breached (for example) when considering the entire year, an annual adjustment must be made which results in the business paying back over-claimed input VAT to HMRC. This can result in an unexpected VAT liability at the year end. Therefore, a business must plan ahead and ensure that it has enough cash available to cover the potential amount of VAT repayable to HMRC.

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By fawltybasil2575
24th Dec 2018 09:31

@ Arthur.

Your post on 22 December 2018 is a correct interpretation of the basic principles.

HOWEVER, those “basic principles” are effectively disregarded where, as in your client’s case, one can take advantage of the somewhat generous “partial exemption” rules.

Based on the figures supplied in your post 0n 21 December 2018, your client would:-

(i) Very probably be able to recover ALL of the Input Tax on the Rental Income expenses, in each VAT period, and (more importantly)

(ii) Certainly be able to recover ALL of the Input Tax on the Rental Income expenses when the partial exemption “annual adjustment” is made.

The above assumes, as an earlier esteemed poster has stated, that the Flat Rate Scheme is not in force.

I have a little doubt re the figures in your post on 21 December 2018 at 15.18. On taxable turnover of 60K, the Output Tax would be a maximum of 12K, hence paying to HMRC 1200 per month (ie 14400 per annum) seems incorrect.

As regards your question re Boxes 6 and 7 on future Returns, no adjustments are required to reflect errors in previous Returns.

Just a cautionary note re the Rental Income. I assume that this relates to a property from which your client receives the whole rents (ie that it is not a property where that Rent is shared with another party). If perchance that assumption is incorrect, then the Rental Income figures do NOT come into play re your client’s VAT Returns.

You will find that your client has indeed overpaid his VAT (hence, when you have calculated the overpayment, add it to the Input Tax figure on the next VAT Return).

Finally, another cautionary note: I assume that your client’s sole trade is one where at least the majority of the customers will be reclaiming the VAT: if not so, of course, the decision to register for VAT in January 2018 will have been an unwise one (as it was not compulsory).


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By arthurallan
24th Dec 2018 09:40

Thank you Fawlty
Yes you are right it should have been £1200 per quarter VAT paid NOT per month. Sorry

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