Maya Chen
Whether you need to charge VAT on rent depends on the type of property and the circumstances of the rental. Generally, income from residential property is exempt from VAT, but there are exceptions, such as holiday lettings, which are subject to the standard rate of VAT (20%). Commercial property is typically exempt from VAT, but landlords can choose to charge VAT if they qualify for certain exceptions. In such cases, tenants who are VAT-registered can reclaim the VAT they have paid.
Do I have to charge VAT on rent?
| Characteristics | Values |
|---|---|
| Residential property | Generally exempt from VAT |
| Holiday lettings | Subject to VAT at the standard rate (20%) |
| Commercial property | Typically exempt from VAT, but there are exceptions |
| Holiday accommodation rentals during the off-season | VAT-exempt if leased as residential accommodation for more than 28 days in a location with a seasonal holiday trade |
| Building materials supplied separately | Charged at the standard rate of 20% |
| Conversion of a single-occupancy dwelling to multiple occupancy | Reduced rate of VAT at 5% applies |
| Sale of a new building | Subject to VAT, but investors can recover the VAT paid |
| VAT registration | Required when a company exceeds the VAT threshold; businesses below the threshold may voluntarily register |
| VAT invoice | Required by law to be issued once a month or every 21 business days; both landlord and tenant must be registered for VAT to issue and recover VAT |
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What You'll Learn
Residential property
In the UK, landlords of residential properties do not need to worry about charging VAT on rent. Residential letting is generally exempt from VAT, including single-let, HMO (House in Multiple Occupations), and normal residential lettings. This means that landlords cannot charge VAT on rent for their residential properties, and tenants will not pay VAT on their rent.
However, there are some exceptions to this rule. If a landlord chooses to opt to tax, they can charge VAT on rent for their residential properties. This means that the landlord voluntarily registers for VAT with HM Revenue and Customs (HMRC). This may be beneficial in certain circumstances, such as if the landlord wants to recover VAT spent on property development or other costs.
Additionally, serviced accommodation, such as holiday lettings like Airbnbs, are not exempt from VAT and are subject to the standard VAT rate of 20%. If a property business rents out serviced accommodation and its turnover exceeds the VAT registration threshold (currently £85,000-£90,000 per year), they must register for and charge VAT.
It is important to note that the rules regarding VAT on rental properties can be complex and may depend on various factors, such as the type of property, the ownership structure, and the specific circumstances of the landlord and tenant. Therefore, landlords and tenants should seek professional advice to understand their specific VAT obligations and entitlements.
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$12.88 $16.03
Commercial property
As a general rule, the lease of a commercial property is exempt from VAT, which means that the tenant does not have to pay VAT on their rent. This exemption extends to the exchange of interests in, rights over, or licences to occupy commercial properties. However, landlords can opt to charge VAT at the standard rate (currently 20%) on rental income. If they do so, they must charge VAT on all supplies relating to that property, including all other costs linked to a commercial lease, such as periodic maintenance fees. This can benefit landlords by allowing them to reclaim any VAT charged to them relating to the premises.
If a landlord or vendor opts to tax a property, they must notify HMRC of their intentions in writing within 30 days. This can be revoked within the first 6 months, provided certain conditions are fulfilled, such as the repayment of any input tax deducted as a result of making the option. The option can be revoked after 20 years from the date of opting to tax.
There are certain exceptions to the exemption rule. The sale of a 'new' commercial property—i.e. a property that is less than three years old—will be liable for VAT at the standard rate. In these situations, the buyer of a new commercial property who intends to rent it out is likely to elect to charge VAT on rents going forward and on a future sale of the property (unless it qualifies as a Transfer of Going Concern (TOGC)). A TOGC is outside the scope of VAT and so no VAT will be payable, which could be an attractive option for buyers.
Another exception is that serviced accommodation businesses with rental income over £90,000 must register for VAT. If you are approaching or exceeding the VAT threshold, VAT registration is required within 30 days. It is wise to consider registering for VAT before you reach the threshold or the 30-day period.
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Holiday lettings
If you are letting a furnished holiday home in the UK, there are specific tax rules that apply. Unlike residential lettings, holiday lets are subject to Value Added Tax (VAT) at the standard rate of 20%. This is because HMRC considers holiday lets to be an investment, and therefore any income generated from them falls within the scope of VAT.
However, there are certain conditions that must be met for a property to qualify as a holiday let for VAT purposes. The property must be furnished and should not be let out on a long-term residential basis. Instead, it should be rented out as short-term, furnished sleeping accommodation for visitors. Additionally, the gross income from your holiday let must exceed the VAT threshold of £90,000 for it to be compulsory to register for VAT.
It is important to note that the VAT threshold is measured on a rolling 12-month period rather than a fixed period like a calendar year or tax year. This means that if you have multiple business activities, the threshold applies to all of them combined. For example, if you own a farm with a turnover of £75,000 and also have a holiday let that generates an income of £16,000, you would need to register for VAT as the combined income exceeds the threshold.
Once registered for VAT, you must keep digital records of your VAT transactions, including the time and date of the transaction, the value, and the rate of VAT charged. You should also retain any invoices or receipts related to your VAT records for at least six years. VAT returns must be filed either quarterly or annually, and it is important to meet the deadlines to avoid penalties.
It is worth noting that holiday accommodation which is let out of season may be exempt from VAT if it is leased as residential accommodation for more than 28 days in an area with a clear seasonal holiday trade. Additionally, if your income from holiday lettings is below the VAT threshold, you may not need to register for VAT and therefore would not charge VAT on your rentals. However, it may still be advantageous to voluntarily register for VAT, as it allows you to reclaim VAT on purchases and services related to your business, such as renovation expenses.
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VAT registration
In the UK, businesses must register for VAT when their taxable turnover exceeds £90,000 in a rolling 12-month period. You must register within 30 days of the end of the month when you went over the threshold, and your effective date of registration is the first day of the second month after you go over the threshold. For example, if your total taxable turnover for the last 12 months is £100,000 on 15 July, you must register by 30 July, and your effective date of registration is 1 September.
You can also choose to register for VAT voluntarily if your turnover is less than £90,000. This is particularly useful if you work with VAT-registered clients or want to reclaim VAT on your business expenses. However, you must pay HM Revenue and Customs (HMRC) any VAT you owe from the date they register you.
If you are unsure about the VAT registration process or need help with your application, you can seek professional advice from VAT consultants or tax consultants. These consultants can guide you through the process, ensure compliance with VAT laws, and help you with your specific business needs.
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VAT recovery
The applicability of VAT on rent varies depending on the nature of the property and the type of lease. While residential property rentals are generally VAT-exempt, commercial property leases may attract VAT, which can impact the landlord's ability to recover VAT on related expenses.
For residential properties, the letting is typically considered an exempt supply for VAT purposes. This means that VAT is not charged on rents received, and landlords cannot reclaim VAT on associated costs. However, there are certain circumstances where VAT recovery on residential property costs may be possible, especially if the landlord is VAT-registered and conducts a separate business.
In the case of commercial properties, the lease or sale is usually VAT-exempt, reducing costs for tenants or buyers. Consequently, landlords or buyers cannot recover VAT on related expenses. However, landlords have the option to charge VAT on rent and other costs linked to the commercial lease, such as maintenance fees. This enables them to reclaim VAT incurred on expenses related to the premises, such as refurbishment costs.
To recover VAT on business expenses, individuals or businesses must be VAT-registered. This can be done through a VAT return, and there are specific rules for organisations that are not VAT-registered. It is important to note that only VAT on purchases related to the business's 'business purpose' can be reclaimed, and valid VAT invoices must be provided.
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Frequently asked questions
No, income from residential property is generally exempt from VAT.
Commercial property in the UK is typically exempt from VAT. However, landlords can choose to charge VAT on rent and all other costs linked to a commercial lease, such as periodic maintenance fees.
Holiday lettings are subject to the same rules as hotels and are usually charged VAT at the standard rate of 20%. However, if the property is rented for more than 28 days out of season, it is exempt from VAT.
Yes, only VAT-registered landlords can issue VAT invoices and allow tenants to reclaim VAT.
VAT invoices are required by law to be issued once a month, every 21 business days.
