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Written by Aadil Butt of The Finance Equation
This article looks at VAT on rental income and serviced apartments.
I often get asked by residential property landlords if their rental income is subject to VAT. I am a chartered certified accountant at The Finance Equation. The Finance Equation Ltd are Chartered Certified Accountants, regulated by the ACCA, and tax advisors. We primarily service clients throughout London and Essex. If you hold residential property and rent it out using AST’s, then your rental income is an exempt supply for VAT purposes. So no VAT is payable, but you also cannot reclaim VAT on purchases.This is covered by VAT Notice 742–
• Property, land and buildings – grant, or licence, to occupy land or buildings – Exempt for VAT purposes so cannot register for VAT.
You can if you wish inform HMRC that you wish to exercise an “Option to Tax” covered by VAT notice 742a. Which means that you would now pay VAT at standard rate, 20%, on all your supplies as well as reclaim VAT on any payments. I cannot think of any circumstance where it would benefit a landlord to use an “Option to Tax”, particularly as your rent charge to tenants would increase by 20%. The above is true if you hold property in your personal name or a limited company.
There is one specific area of residential property that could be subject to VAT and that is serviced lets. As service lets are a hot topic currently, it’s worth spending a little time on this matter. The questions I get about VAT normally come from people who have a serviced lets business within their portfolio.
Under VAT notice 709/3covering hotel, holiday accommodation & similar establishments, defines similar establishments as follows –
“Establishments with similar characteristics to hotels, inns and boarding houses; and any premises, in which furnished sleeping accommodation is provided, that are used by or held out as being suitable for use by visitors or travellers (but not if such use is only occasional).
This includes: motels, guesthouses, bed and breakfast establishments, private residential clubs, hostels, and serviced flats (other than those for permanent residential use).”
Vat notice 709/3means that the entire amount is subject to VAT at standard rate, 20%, if you have a serviced accommodation business. You should note the following –
• You can claim the “reduced value rule” this means that if someone stays with you continuously for more than 28 days on the 29th day the rent element is not vatable. You still have to charge vat on the “service” element. Notice 709/3 has this to say –
“If you make an inclusive charge for bed and board you must apportion it reasonably and charge VAT on the full amount that is not for the accommodation. When you do this, you must calculate the amount of your charge that is for meals, drinks and other services, and also treat at least 20% of the remainder as being for facilities. However, if the true value of the facilities is more than this, you must charge VAT on the true amount.”
• Unfortunately the reduced value rule is not allowed if you have a corporate client making a block booking, i.e. over 29days, but each person they send to you stays for less than 29 days.
What’s important to note is that it is up to the landlord to show HMRC how your portfolio fits in with the VAT rules, and that HMRC are unlikely to enquire about VAT when it comes to residential property. Of course that doesn’t mean that they won’t! Having spoken to several HMRC inspectors of their opinion regarding VAT on serviced lets, it is interesting to note that opinions seem to differ. I always get clearance from HMRC as to a clients VAT position for my serviced lets clients. In addition if your serviced lets Gross rental income is less than £83,000 you don’t have to register for VAT and therefore do not have to charge VAT on your serviced lets income, but also cannot reclaim VAT on purchases.
For more information, call me on 0203 086 7472 or you can catch up with me at the next Essex Property Network event by clicking here.
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