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What is the correct VAT treatment?

Freehold land rent+VAT, under option to tax, Leasehold mixed commercial & domestic premises, VAT?

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A freeholder has land which is the subject of a lease to a developer who has built a three story commercial premises (mixed office and retail). The lease specifies a ground rent in respect of the building, which is charged with the addition of VAT at the appropriate rate to the management company of the building, due to the freeholders option to tax. The management company then charges a service charge and ground rents to the leaseholders with the addition of VAT (it too has opted to tax). In recent years there have been applications for change of use in regard to a number of the units from office premises to domestic premises (appartments). The management company (which is VAT registstered) has continued to charge the ground rent to appartment owners with the addition of VAT, which I beleive is incorrect. The owner of one of the appartments is adamant that the freeholder must now apportion the ground rent invoice, to the management company, between the commercial and the domestic premises. Is this correct? I believe that the freeholder should charge VAT but the management company then has to charge VAT to commercial leaseholders but not to residential leaseholders.

What say you AccountingWeb?


Replies (3)

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By Les Howard
29th Jul 2019 14:45

An apportionment looks likely, but I think a complex property transaction like this needs some fuller advice beyond what we can provide via a forum.
You will need to ask Partial Exemption and CGS questions too!

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Replying to leshoward:
By philevans2003
29th Jul 2019 15:25

Thanks for your reply Les.

I had thought about an apportionment, however, the freeholder is unaware as to which units in the property are commercial and which are residential. In fact, the freeholder is not 'supplying' a building but merely the ground on which the building is built. He has no involvement in the building whatsoever. He is has given a lease to the management company with no reference to the units within the building.

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By Les Howard
29th Jul 2019 17:22

You can use any 'fair and reasonable' method of apportionment, e.g: numbers of units, valuations, etc. But do make it simple to operate!

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