Landlord charging VAT on disbursement like Rates and Insurance.

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It was a busy week for Paul after his office move. When he first come on board as my client, he was running his small marketing company from a studio in Welling. The business was booming and the team was expanding. Last week he moved to a new office which they sub-let from a hospitality company.  The deal between them was somewhat like this. The hospitality company would pay the rent, utilities, rates and insurance. The hospitality company would then send an invoice to Paul’s company for disbursement of shared costs.

Just after the move, they received the first rent invoice from the hospitality company. The bill read somewhat like this.

Share for Rent – £1500

Share for Gas & Electricity – £300

Share for Rates – £200

Share for Insurance – £110

Total – £2110

VAT – £422

Total – £2542

When Paul received the invoice, he immediately queried it saying Rates and Insurance are outside the scope of VAT and that, the hospitality company should not charge the VAT.

Under what circumstances a landlord can add VAT to Rates and Insurance?

In order to get an answer to the question, you need to ask two questions.

Q: 1 – Who does the Cost actually Belong To?

The first thing to check is whether the cost is even the landlord’s to begin with. In the case of buildings insurance, is the landlord the insured party on the relevant policy, or is it the tenant?  For business rates, does the landlord’s name appear on the local authority demand, or is the tenant actually the rateable person?  Similarly, with a recharge for the upkeep of common areas, does the lease stipulate that the landlord is responsible for such costs (and is able to recover them via a service charge)?

Where the answer to the question is “the landlord”, the cost does actually belong to the landlord. As such, its recharge to the tenant is an additional supply to the rent, and, depending on the outcome of Step Two below, might be subject to VAT.

Clearly, if the answer to the first question is “the tenant”, then the cost is proper to the tenant, and  the landlord is simply looking to be reimbursed for funding the tenant’s own costs.  In these circumstances, the recharge can be treated as a ‘disbursement’, which means it is not subject to VAT, regardless of the outcome of Step Two (in other words, Step Two can be ignored).

Q: 2 – Has the Property been Opted to Tax?

Having established that the cost belongs to the landlord, a check should now be made on whether the property has been Opted to Tax. This should be a simple question to answer, because if it has been Opted to Tax, VAT will have been charged (or else should have been charged!) on the rents.

It should be noted that in these circumstances, regardless of the Option to Tax position, the recharge of insurance, rates, or upkeep costs is actually an additional supply of rent. It cannot be treated as an onward supply of insurance or rates, because the landlord is not itself an insurer or local authority.

As the recharge is effectively rent in another name, it follows that where an Option to Tax has been taken to add VAT to the main rents, any recharge of insurance, rates, or upkeep would also be subject to VAT.  Conversely, where there is no Option to Tax, the recharge is then free of VAT (i.e., it is exempt).

Summary

Remember, the primary fact for landlords to establish when considering if VAT should be added to a recharge is whether the cost is actually theirs. Specifically, they should ask themselves “Am I the insured person, the rateable person, or upkeeper of the common areas of the property?” If the answer is “yes”, VAT will be chargeable where an Option to Tax exists (otherwise exempt). If the answer is “no”, the cost will be proper to the tenant, and can be treated as a VAT-free disbursement.