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What is VAT payable on Rental Deposit?

Rental Deposit 5000 with a "VAT Retention" of 1000, then what is the VAT that then applies?

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As I understand it, for a deposit of £5000 if there is a "VAT retention" of £1000 this held by the landlord as contingency if the tenant defaults and the landlord has to make use of the deposit. In our case, the other party then charged a further £1000 on top of this for VAT. Is this correct? I would assume that no VAT is charged on the "VAT retention"itself?

Just to be clear, which amount should be included in their quarters VAT Return? (I would assume £1000 and the "VAT Retention" would appear in the VAT Return only if the deposit were called upon by the landlord). 

To dispel any doubt there was no question of default on the rent paid.

On termination of the lease the landlord refunded only £5000 on the grounds that as the VAT amounts are a receipt they would only be paid over to HMRC by ourselves as VAT anyway. If we assume this argument holds (and it itself seems illegal) then at the minimum they should have refunded is £5000 + £1000 being the "VAT retention".

The other party are a professional commercial property management company. Accordingly, I should be very interested in your comments and views.

 

 

Replies (14)

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By the_drookit_dug
21st Oct 2020 21:11

Am I correct in thinking you paid £7,000 in total? (£5,000 + £1,000 "VAT retention" + £1,000 VAT).

Doesn't sound right to me. You should only have paid £6,000 in the first place. Did you receive a VAT invoice when you paid the deposit, and - if so - did you reclaim any VAT?

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Replying to the_drookit_dug:
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By peterhock
22nd Oct 2020 10:13

Yes we paid £7000. We were not vatable. No no VAT invoice received.

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By Anonymous.
21st Oct 2020 21:11

Wouldn't have thought that a deposit was a VATable supply.

Have they offered a VAT receipt?

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chips_at_mattersey
By Les Howard
21st Oct 2020 21:39

I would expect a deposit is not ‘consideration for a supply’ even if it is said to include VAT. But the terms of the lease will determine the correct position.
But the ‘VAT’ amount should be refundable.

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Replying to leshoward:
RLI
By lionofludesch
21st Oct 2020 23:18

I read it as they want £6000 deposit but they won't be paying over any output tax unless the lessee defaults.

Hence, no supply and no input tax.

Could be wrong. Just trying to decipher the facts.

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Replying to lionofludesch:
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By Paul Crowley
22nd Oct 2020 03:24

That is exactly as I got it
£6000 deposit, that on failure becomes £5,000 rent plus VAT

Nothing goes on VAT return.

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By Wanderer
22nd Oct 2020 06:23

Based on the facts provided.

If the total paid was £6,000 then £1,000 amount of the initial deposit is not VAT, it is an amount equivalent to VAT. It isn't input VAT and doesn't go onto the return.

The sentence starting 'On termination ....' is complete rubbish. The whole £6,000 should be returned.

If the other party are making that argument then they are NOT a "professional commercial property management company".

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Replying to Wanderer:
RLI
By lionofludesch
22nd Oct 2020 06:34

Well, maybe. But in practice, the deposit becomes the last month's rent, does it not?

Does anyone exchange payments of £6000? I wouldn't have thought so.

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Replying to lionofludesch:
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By Wanderer
22nd Oct 2020 06:48

Actually, in practice, £5,000 + VAT often becomes the amount that the landlord tries to extract out of the former tenant as dilapidations.

Not always wise to withhold last month's / quarter's rent on the basis that it's covered by the deposit. If this is done then often other conditions in the lease will kick in.

Personal experience is to avoid rent deposits if at all possible. Failing that get it written into the lease that's it's returned say year 3 of a 5 year lease following prompt payment of rent throughout those 3 years. Even then landlords, or their representatives, will do their best to hold on to it.

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Replying to Wanderer:
Hallerud at Easter
By DJKL
22nd Oct 2020 08:47

Some will some will not, we certainly do not, if deposits need returned we return them.

Maybe it depends upon size but if you are gathering in rents of over £1m a year, mainly in one city, your reputation tends to be important, often we have business entities who over the years have rented various properties from us, what is the point of getting a bad reputation, one just loses repeat trade?

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Replying to lionofludesch:
Hallerud at Easter
By DJKL
22nd Oct 2020 08:43

Yes, all the time.

We carry about £60k of deposits, tenants normally pay the full amount of rent then we refund- deposits often cover far more than rent they usually cover all lease obligations including say dilaps etc and reimburse us if a lease says tenant should redecorate in final year but they have not etc.

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Replying to Wanderer:
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By peterhock
22nd Oct 2020 14:11

Quite agree. The rental deposit on the Lease Completion Statement was £6000 (£5000 +VAT Retention £1000) + VAT of £1000, i.e., £7000. All opinions concur that no tax point is created with a deposit hence additional VAT should not have been charged. HMRC point me to VAT Guide 14.2.3 14.2.3 Deposits

"Most deposits serve primarily as advance payments and will create tax points under paragraph 14.2.2(a) when you receive them. But some types of deposit are not a consideration for a supply and their receipt does not create a tax point.

For example, if you take a deposit as security to ensure the safe return of goods you have hired out, and the deposit is either refunded when the goods are returned safely or forfeited to compensate you for loss or damage, then no tax point is created.

Also, if a third party acts as a stakeholder (as opposed to an agent of the vendor) in a supply of property and receives a deposit, then no tax point is created until the money is released to the vendor."

Second para is the crucial one. Therefore, they were incorrect in levying additional VAT.

My view is that they should refund £7,000.

To explain without complicating matters, the initial lease was an assignment to us of someone else's, i.e. it is an inherited position. The property company argue that the figures were validated by their accountants but I cannot see that they were anything other than plain wrong. Looks like I will need to pass it through the small claims court to affirm the debt, as we are £2000 out of pocket.

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Replying to peterhock:
Psycho
By Wilson Philips
22nd Oct 2020 14:41

What I am failing to understand, quite apart from the question of whether or not there was a taxpoint, is why you were charged (and why you agreed to pay) a second £1,000.

Out of interest, how much did you pay the previous tenant for the assignment - presumably it reflected the deposit?

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Replying to peterhock:
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By Wanderer
22nd Oct 2020 14:40

This is where we discussed it before:-
https://www.accountingweb.co.uk/any-answers/vat-on-office-rent-deposit
Note that Les, our resident VAT expert, edited his (unusually incorrect) post after I posted mine. Normally I wouldn't contradict Les on VAT matters but had to on this one!

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