So, I have a client within the VAT FLAT RATE SCHEME. He is the sole proprieter of a nightclub.
He has recently purchased a residential property for rental and has set up a contract with a VAT registered management agent for rental income received and HMRC VAT have said that this income must be included in his VAT returns.
They have said that because the gross rental income is small and below 10% of his overall turnover then must be included withing the VAT FRS at the nightclub VAT FRS rate. So, if the management company invoices my client invoices gross including VAT at 20% for the monies he receives, my client pays over VAT to HMRC at a FRS rate which is less than what the management company reclaims in their purchase invoice. This cannot be right as HMRC will be losing out?
Am I seeing this wrong, can anyone point me to VAT legislation on this one and does anyone have practical experience of how the VAT FRS works if clients have more than one business? Thank you.