Many landlords are unsure if they should charge VAT on rental income. Rental income can come from various sources, whether residential, holiday lettings or commercial property.
Unfortunately, no VAT rule tells you definitely whether or not to charge VAT on rental income. Different scenarios within each rental type may also make you VAT exempt or liable. With almost 5 million rental properties in the UK, it’s crucial to determine which situation applies to you.
How VAT works
Value added tax (VAT) is added to the price of many taxable supplies and goods in the UK. Most people know that VAT makes everyday items a bit more expensive but business owners and landlords need a deeper understanding.
When a company exceeds the VAT registration threshold, it must register for VAT with HM Revenue & Customs (HMRC). Businesses trading under the threshold may also choose voluntary VAT registration. Once you’ve registered, several additional responsibilities include collecting VAT, filing VAT returns, and paying your VAT bill.
Depending on your business activity, different VAT rates may apply:
- Standard rate of VAT (currently 20 per cent)
- Reduced rate (currently 5 per cent)
- Zero rated (0 per cent)
Some goods are also VAT exempt.
What is VAT exempt?
Selling, renting, or leasing property are generally exempt for VAT purposes with many potential exceptions. Being exempt has its pros and cons.
When a landlord’s business activity is exempt from VAT, the prices they charge tenants will not include VAT and might be more competitive as a result. This can have a positive impact in reaching a wider market.
It does, however, mean that a landlord with a VAT exempt supply of property can’t recover the VAT from any costs. In fact, being able to recover costs is why many landlords may choose to charge VAT. To begin, let’s look at residential rental property.
Do you charge VAT on residential property rent?
Generally, residential property rent is VAT exempt. A residential rental is usually a simple tenancy agreement between landlord and tenant, with many managed by a letting agency. If the landlord does not own any other business, they cannot register for VAT. As such, no VAT should be added to the payment of rent.
So, does this mean that residential property landlords cannot recover the VAT spent on their properties? Not necessarily. In some cases, buy to let landlords might be able to recover VAT costs incurred through decorating the property, for example.
To recover residential property VAT, the landlord must also own another VAT registered business. This way, both businesses would share the same VAT registration. In this case, the VAT added to certain costs like agency fees and refurbishment might be recoverable under HMRC’s VAT de minimis rule.
Recovering VAT on buy to let property income is a tricky situation. Landlords must be careful. If you are in any doubt, ask yourself: do I need an accountant? In some cases, this could lead to you recovering a good amount of VAT.
Do you charge VAT on holiday lettings?
VAT on holiday lettings is another complex situation. Hotel rental income, for example, is usually subject to VAT. Holiday lettings fall into a grey area between residential property and hotels. There’s also the question of who owns the property? The rules can change depending on if a business, partnership or sole trader is the owner.
Fundamentally, holiday lets are subject to the same rule as hotels: they should charge VAT. But not all do. That’s down to the VAT threshold. Many holiday let owners don’t turn over the required VAT threshold amount currently £85,000 per year meaning they don’t need to add VAT to their rates.
Conversely, holiday lettings landlords turning over more than the VAT threshold must register for, and charge, VAT. This can increase rates, but can also make VAT spent on the property recoverable. From April 2022, holiday lets are subject to standard rate VAT of 20 per cent.
Many aspects involved in holiday lettings normally include VAT, such as:
- Cleaning
- Laundry
- Catering
- Some transportation costs.
If in doubt, speak to a professional accountant.
Do you charge VAT on commercial property rent?
Typically, rental income from commercial property is VAT exempt. However, VAT on commercial rent income is perhaps the trickiest of all rental types. There are many types of commercial premises, each owned by different entities and leased by companies in various industries with several rules in place for each.
Many situations affect whether or not you should charge VAT on commercial rent. Landlords wondering whether to charge VAT on commercial buildings should always seek professional advice.
Opt to tax
In many commercial rental situations, it could make sense for the landlord to charge VAT. This is typically when there are significant costs to recover. In this case, property owners can choose to opt to tax their commercial buildings.
Opting to tax is a big decision. To do so, an owner must submit Notice 742a to HMRC and charge VAT on their rent. Once signed, the owner must then charge VAT on any future sale, commercial lease, and the majority of costs involved in that commercial property’s rental agreement.
Obviously, this will increase costs. But it also allows owners to recover VAT paid on refurbishments and other outgoings. The opt to tax law comes with exemptions and considerations too numerous to mention, so professional advice is critical.
Transfer of going concern
Another commercial property rental VAT consideration is the transfer of going concern (TOGC). If an opt to tax property has been sold with an existing tenant in place, it can be unclear whether VAT should be applied. In most cases, the new owner could be required to charge VAT.
TOGC rules are unsurprisingly quite complicated. If the new owner intends to keep the existing tenants, then the sale of the property might count as a TOGC. This would generally make it VAT exempt and, potentially, more attractive to investors.
Like the opt to tax laws, TOGC laws are plentiful and intricate. Great care should be taken when exploring TOGC real estate opportunities, with expert advice taken at every step.
New Commercial Property
A further commercial rental income wrinkle comes with the sale of new commercial property. For the avoidance of doubt, new’ commercial property is classed as three years old or less.
In the majority of cases, sales of a new building are subject to VAT. An investor in this situation is then likely to benefit from opting to tax, allowing them to recover the VAT paid on the purchase. Of course, all future charges would then be subject to VAT with the exception of TOGCs.
Charging VAT on rental property
VAT on rent income is a complex subject. Residential landlords are unlikely to ever deal with VAT. Similarly, holiday lettings landlords should only have to charge VAT once they’ve reached the compulsory VAT threshold. Commercial landlords typically won’t charge VAT unless they qualify for some of the various exceptions.
The bottom line is that VAT with property rental is tricky. In the right situation, recovering VAT spent can provide large cash injections for landlords. In all cases, owners should avoid non-compliance and seek a qualified professional for more information.
