VAT tips for landlords – utilising HMRC’s partial exemption de minimis rule to reclaim VAT on exempt expenses
Buy-to-let landlords cannot usually reclaim VAT on their expenses. Whilst HMRC considers that renting out homes is a business for VAT purposes, it is an exempt one.
This can be bad news for landlords because exempt businesses are prevented from reclaiming VAT paid on expenses. However, if the landlord also operates additional businesses which are VAT registered, there might be a way they can claim the VAT as our VAT team explain.
In a situation where a landlord owns two or more businesses within the same legal entity, they will be covered by a single VAT registration. So if the landlord rents out residential accommodation – an exempt supply – and owns another VAT registered business making supplies which are subject to VAT, transactions relating to both must be reported on the same VAT return.
This presents an opportunity to take advantage of HMRC’s VAT de minimis rule. This says that all VAT on exempt purchases can be reclaimed where it is no more than:
• £625 per month on average; and
• 50% of the total VAT on purchases all your businesses incur in the VAT return period.
By way of illustration, Bob is a builder and also owns a number of residential properties which he rents out to tenants. The residential rental income is VAT exempt. On average Bob incurs VAT of £500 per month (£6,000 per annum) in respect of the residential lettings on items such as ongoing repairs and maintenance, agents’ fees and advertising. The input tax (VAT on goods and services paid for) attributable to the construction business is £30,000 per annum.
On the basis that the exempt input tax is de minimis (the VAT on costs associated with the rental income is less than £625 per month on average and less than half of the total input tax of the business) all the input tax can be reclaimed.
Additionally, if none of the exempt input tax has been recovered in previous years and was also de minimis, a retrospective VAT reclaim can be made going back four years. Using the example above, at £6,000 per annum, this would result in a repayment of £24,000.
It’s important to note however that if you breach the de minimis limit even by £1, none of the exempt input tax can be recovered.
There are potentially millions of pounds VAT going underclaimed. Here are two circumstances which our team has helped out with in the past month:
• We recently registered a client for VAT purposes who is in the process of developing student accommodation. The client had an existing residential property portfolio and previously none of the VAT on associated expenditure had been recovered. Therefore in the registration period, we were able to recover historic input tax totalling £4,500 under the partial exemption de minimis rules. This was an unexpected reclaim for the client.
• Another client operated a VAT-registered taxable consultancy business and recently acquired some residential property. Provided the rental properties incur less than £45,000 worth of gross costs with VAT of £7,500 or under and the VAT is less than half of the total VAT incurred, it can be recovered in full. That VAT refund will be a welcome contribution to any repair and maintenance costs.
To find out more about how our VAT specialists can assist your property and construction business, contact us.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
The information was correct at time of publishing but may now be out of date.