I have a retail client who upsized to a larger shop on which the landland has opted to tax. The moved has not worked out as well as expected and the client is now having to look at subletting the shop and moving his business to a smaller premises until the break clause in the lease. I am aware that our client should not charge vat on the sublet as the supply is exempt but am trying to clarify if they will be able to reclaim the vat they will be charged.
The vat to be reclaimed is £600 per Quarter and on average their input tax is around £2000 (including the £600). Looking at the de minimis rules on partial exemption appears that he will be under the limits £625 per month and 50% of overall vat reclaimed and therefore entitled to reclaim all the vat on the sublet.
Basically I am just looking to clarify if this is correct for peace of mind.
Thanks.
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Piece of mind, for peace of mind...
If that's their only Input Tax relating to exempt supplies then so long as levels remain fairly constant I think you're looking good.
Something to bear in mind is that some overheads should go towards the cost of exempt supplies so a proportion of accountancy, stationery etc. etc. but I'd imagine these are fairly minimal. The marketing and legal costs of getting the tenant in will, as well, be directly attributable to exempt supplies.
The client could of course always opt themselves if necessary to secure recovery, but if they can slip it under deminimis rules then it keeps the cost to the subtenant down and may make for an easier let.
A further point is that whilst it's vacant there's more than a good argument for treating the rent as relating to taxable supplies if the clients locked into the let, and only attributing it to exempt once the tennancy starts, even whilst marketing it as available etc. HMRC may want you to attribute it to exempt as soon as the client's out and looking for a subtenant but in this case I'd say it's the actual change of use rather than any change in intended use that'll be important.