Can your property company reclaim VAT on expenses?

Can your property company reclaim VAT on expenses?

​Your company owns several commercial properties which it lets. You've heard that it can recover VAT on the expenses but only if it charges its tenants VAT on rent. Is there a way to recover the VAT without charging the rent?

​The problem

As you're probably aware, letting a property is usually a VAT-exempt activity meaning VAT must not be charged on rent. The other side of this coin is that where you make an exempt supply you can't reclaim VAT on related expenses, e.g. repairs and improvement costs, agent's fees, etc. The good news is that you can perhaps get the best of both worlds.

​Do you have options?

To turn supplies from exempt to VATable you can "opt to tax" one or more of the properties so that the rent will be standard-rated. As a consequence, your company can reclaim input VAT on expenses relating to the opted properties but must add 20% VAT to the rent it charges. This might not be a big issue for the tenants if they are registered and entitled to recover all the VAT you charge. The trouble is, your current or future tenants might not be in that position. This could make it more difficult for you to find a new tenant.

​Selective options

The option to tax can be made property by property so you could opt to tax a single property. Pick the property with the lowest rent where you know the tenant is able to recover the VAT you charge in full. You might think that this doesn't get you far as seemingly you can still only recover VAT paid on expenses relating to that property. But there's a VAT break involving the so-called de minimis rules.

​Partially exempt

If your company makes both VATable and exempt supplies, it will be partially exempt for VAT purposes. As such, it can reclaim VAT it pays on expenses relating to exempt properties as well as those relating to the opted properties if the exempt VAT doesn't exceed:

​ - £625 per month on average for the VAT return period; and

​ - 50% of all input VAT the company makes.

​If the input VAT is within the de minimis limits, your company can reclaim the VAT it pays on expenses for your company's entire property portfolio, not just for the one property it opted to tax.

​Trap. A partially exempt business must review its VAT position in its first VAT return falling after 31 March each year to check it hasn't over or under claimed VAT according to the partial exemption rules. This is known as the "annual adjustment.

​No option, no problem!

If it isn't desirable to opt to tax one of the properties, your company can become partly exempt in a different way.

Tip. By starting another business selling VATable goods (or services), say, through Amazon, Facebook Marketplace, etc. it will be entitled to register for VAT and, because the registration applies to every activity the company has, it can take advantage of the de minimis limits to recover VAT on the property expenses.

​Either opt to tax a single property and charge VAT on the rent, or create a VATable business for the company, e.g. renting car garage space or selling items on Amazon. Either method allows the company to reclaim VAT on property costs, e.g. repairs, of let property if over the tax year it's not more than £625 per month and 50% of the total VAT.