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Rent, Rates and VAT

Rent, Rates and VAT

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I am the company accountant of a subsidiary of a registered charity.

We are considering taking out a lease on a property for use as a regional office by the subsidiary.

The annual rent is approx. £22,000 + VAT and business rates are approx. £10,000 p.a.

Both the charity and the subsidiary are registered for VAT, the subsidiary being able to recover all input tax, and the charity being partially exempt due to the nature of the bulk of its income.

If the lease is taken out in the name of the charity, I understand that it could get 80% relief on business rates (worth around £8k p.a.).

If the lease is taken out in the name of the subsidiary, it would be able to recover all of the input VAT on the rent, but would not be able to get any business rates relief.

It appears that to arrange the lease in the charity's name would be the best option as the saving in business rates (£8k p.a.) would be greater than the cost of potentially irrecoverable VAT(£4.4k p.a.). 

What I am unsure about is, in these circumstances, whether the charity would be able to recover all of the VAT on the rent, on the basis that the supply of the property to the subsidiary could be argued to be standard rated (as the property is subject to an option to tax by its landlord) and, if so, would this mean it could recover all input tax on the rent. 

Any help would be greatly appreciated.


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09th Apr 2015 21:07

Supply is the question?
You have input vat hitting a company. That input is true to the sub. The next question is does the sub have the right to recover vat? What does that office do? Does it make 100% taxable supplies? If it's does well of course you can recover the VAT. You have to make sure that the sub is 100% taxable? You say the charity is partially exempt well are any of the activities of the charity undertaken in the new office?well if they are that office may no longer be undertaking fully taxable activites and some input tax recovery may be restricted!

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10th Apr 2015 08:03

and ..

If the charity is carrying out charitable activity in part of the building have the landlord'so Option to Tax disappeared to that extent.

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10th Apr 2015 10:23

The office will be used only by the subsidiary for its business which provides 100% standard rated supplies. I know the subsidiary will be able to recover all input VAT it is charged. The charity will not occupy the building, only the subsidiary.

The question is, if the lease is taken out in the charity's name (so the charities business rates relief can be obtained), and the charity then recharges the subsidiary for the rent, can the charity treat this part of its business as a standard rated supply and therefore recover all of the input tax on the rent charged to it by the landlord?

If so, The "group" as a whole would be benefitting from the business rates relief (only available to charities) and recovering all of the input tax on the rent.

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10th Apr 2015 10:32

Would it get Business Rates relief?

The relief is only available if the building is used for charitable purposes. I'm not sure the subsidiary's use of the building would necessarily meet that definition although discretionary relief might be available.

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10th Apr 2015 15:23

Business Rates Relief

Paul,  you may be technically correct in saying that to get business rates relief, the property has to be used for charitable purposes. However, in practice, if the local council charging the business rates are told that the lease is in the name of a charity, this seems to be sufficient, certainly in my experience, to get the relief.

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10th Apr 2015 10:43

Charity lease

Where the charity leases the entire building to its trading subsidiary, then the input tax is recoverable in full, as long as the Charity has Opted to tax.

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10th Apr 2015 10:50

Rate relief / VAT Relief

Isn't the charities rate relief reliant on the premises being used for 'wholly or mainly charitable purposes' [Local Government Finance Act 1988, S43 (6)]?

So it doesn't only matter what name it's in, unless you're just relying on the council to make assumptions, it matters what use it's put to and 100% business trading and/or subletting to a subsidiary doesn't sound like a charitable activity to me.

Additionally the charity would only be able to treat the supply as a standard rated supply to the subsidiary if they themselves opt to tax the property; the option to tax is specific to the entity which opts it it isn't generally attached to the property.

So without an option the charity would worsen it's partial exemption position if taking out the lease, and unless you've already given the local authority all the details and they've confirmed that they'll view the subletting or the trading as a charitable activity they might not benefit from any rates relief either.

I don't think they're likely to get the benefits out of this that they think they might!

[EDIT: Looks like I should have refreshed before posting!]

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