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VAT and rental income

VAT and rental income

I have just read in my tax guide that "VAT covers many activities which would be regarded for income tax purposes as generating

investment income, for instance, the letting of property is regarded as a business for VAT purposes". 

I am familiar with commercial property and waiving the land exemption, but I have to confess that I have always assumed that buy to

let rental income did not come within the VAT regime.  Indeed, I have never come across anyone being VAT registered where their only

income was derived from residential lettings.  Unfortunately, the tax guide does not differentiate between commercial lettings and

residential short term tenancies.

I have a client who has, over a period of several years, built up a portfolio of residential property that represents his only source of

income.  Whilst he has yet to make a surplus in any year since he first started, he survives by selling a property every other year or so, 

his gross rents are now well over the VAT registration threshold.

Even though the losses to date could well support an arguement that he is not in fact in business, is the tax guide correct, should he

register for VAT? 

Many thanks to anyone able to clarify the position.


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By Anonymous
15th Feb 2010 15:22

Residential = exempt

If it's all residential property it will be exempt, so no need to register unless your client (ie the same VAT person) is also registered in respect of other VATable activities and using the flat-rate scheme, in which case VAT is payable at the flat-rate percentage on the exempt supplies.

Thanks (0)
15th Feb 2010 16:20

The Tax guide is correct

Unfortunately it doesn't quite go far enough. As the last poster said all the income will be exempt for VAT purposes, this is because the activity is a business. If it was not a business activity then it would fall outside of the scope of VAT.

What this means for most people is that where you derive income from residential letting (other than having a lodger in your own house or letting your house whilst you're taking a six month cruise etc.) then you need to include it in your VAT calculation and will be partially exempt with the various issues that entails.

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By Anonymous
15th Feb 2010 17:04

the flat rate scheme

is a real potential nasty...had to extracate a sole trader who unbeknown to us until we did the accounts had entered the scheme a while back and yes you've guessed it who also had a substantial portfolio of resi investment properties...cost him a lot of money ...

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31st May 2012 15:30


so if a vat registered business not in the flat rate scheme has a rented property can he claim back input tax on the rented property. ie vat on repairs and agents fees .

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By A.Sharp
to Tornado
28th Jun 2012 10:26

Partially Exempt - Rented property

If the input tax related to exempt supplies is above the de minimis level (£625/mnth), then the person is partially exempt and the following will need to be done every VAT period:

1). Direct attribution of of the input tax - recoverable (related to vatable supplies) and non recoverable (related to exempt supplies). Input tax which cannot be wholly attributed to one or the other is called residual input tax.

2). Apportionment of the residual input tax by partial exemption (apply the ratio of the value of taxable outputs to total outputs).

      Residual input x taxable output/total output

3). Perform a yearly summary to accommodate fluctuations. 






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25th Apr 2015 13:30

Rental income


I am planning to sign up a lease for a commercial property i.e shop...

The Agent said I have to pay VAT on the rent..

example 20k per annum + VAT.

According to my understanding, VAT shouldn't be apply here.

Please help.




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16th Jun 2015 10:47

Rental income

If the commercial property has an option to tax, thus allowing the purchaser to reclaim VAT on the purchase of the building then VAT will be liable on the subsequent rent charged.



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