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VAT

Buildings are normally exempt from VAT and therefore VAT is not normally charged on rent. However, a landlord can ‘opt to tax’ a building to reclaim the VAT on expenditure related to the building. Once a building is opted to tax, a landlord has to charge VAT on rent for at least 20 years. If you are planning to let space to organisations that are not VAT registered (and therefore unable to reclaim VAT), bear in mind that opting to tax the building will increase their rent by the current VAT rate.

Do I need to charge VAT on the rent?

As mentioned above, a landlord can ‘opt to tax’ a building (also known as ‘election to waive exemption’). Once a building is opted to tax, a landlord has to charge VAT on rent for at least 20 years.

When a building is opted to tax, a landlord can reclaim the VAT on expenditure related to the building. Therefore, a landlord will often opt to tax a building if they are undertaking significant refurbishment or redevelopment.

If you are planning to let space to organisations that are not VAT registered (and therefore unable to reclaim VAT), bear in mind that opting to tax the building will increase their rent by the current VAT rate.

Note that the option to tax applies to the landlord who has opted to tax, not the building. Whether or not your landlord has opted to tax therefore has no impact on whether you charge VAT on the rent if you sublet. You only charge VAT on rent if you have opted to tax the building (likewise, if a building is sold, the purchaser can decide whether to ‘opt to tax’, regardless of the previous status of the building).

Do I need to charge VAT on the service charge?

If you charge for rent and service charge separately (known as a ‘separate supply’), you will only charge VAT on the service charge if your organisation is VAT registered. If you charge a single fee that includes rent and service charge (known as a ‘composite supply’), then you will only charge VAT on this fee if you have opted to tax the building.

How do we opt to tax our building?

If you are undertaking significant works to the premises, you may wish to opt to tax the building, to enable you to reclaim VAT on the refurbishment or construction costs. Beware that VAT registered charities cannot necessarily reclaim 100% of the VAT they pay, so the benefits to a charitable landlord of opting to tax may be less. This is a complex area, so take expert advice before making a decision.

As a landlord, you can choose whether or not you wish to opt to tax your building. However, once the building is opted to tax, you cannot revoke the option for at least 20 years. The option to tax will apply to all future rents of the building – and any sale of the building.

Follow this link for the HM Revenue and Customs guidance on 'Opting to tax land and buildings'.

If you are considering opting to tax your building, you should take professional advice to ensure you fully understand the implications of this action. The Foundation can put you in touch with a VAT specialist from our Register of Property Professionals.

Use the links below to view further HM Revenue and Customs guidance on VAT:

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