VAT is always an issue that needs to be understood for lettings.
While most supplies are subject to VAT at the standard rate, the starting point for letting land and buildings is that the supply is a VAT exempt business supply.
If the room is hired to facilitate catering then it will be important to consider if the hire is then a standard-rated supply of catering, instead of VAT exempt room hire.
However, HMRC guidance confirms that where a kitchen is hired with a hall the letting can still be treated as room hire, provided that the hirer assumes full responsibility for the use of the kitchen.
Single or Multiple Supply & Invoicing
When considering the VAT treatment for other facilities lettings a decision is required as to whether the hire is primarily one of land and buildings or whether it is for the specialist facilities, such as gym equipment or science laboratory facilities. If the hire is primarily for the specialist equipment then it loses its character as a letting of land and buildings and becomes a standard rated supply.
Sometimes the hire of a room includes only some specialist facilities, such as a computer projector, microphones, lighting, or staging. Where neither the room hire nor the additional equipment are the overriding main supply it will be acceptable to split the invoice between VAT exempt room hire and standard-rated equipment hire.
Capital Goods Scheme
Where VAT is reclaimed on the construction or major refurbishment of buildings it may be necessary to make adjustments to the VAT claimed if more than one type of use is made of the building (e.g. where there are VAT exempt lettings as well as non-business school use). These rules are called the Capital Goods Scheme (see HMRC Notice below).
The "Option to Tax"
There is an opportunity to "opt to tax" land and buildings by formally waiving the exemption from VAT that applies to the letting of land and buildings. This planning measure can help recover additional VAT incurred on costs by converting exempt lettings into standard rated supplies. Specialist advice should be sought as the election lasts for at least 20 years and is not necessarily beneficial, as VAT must then be charged on rental income.
- The VAT exemption for the letting of land is contained in the VAT Act 1994, Schedule 9, Group 1.
- HMRC Notice 742 "Land and property"
- HMRC Notice 706/2 "Capital Goods Scheme"
- HMRC Notice 742A "Opting to tax land and buildings"