How does VAT work with commercial properties

It’s customary for leases between landlords and tenants to outline the services the landlord will provide and what the tenants are responsible for regarding the upkeep of the entire building. The lease might specify an all-inclusive rental fee. Whereas it may stipulate that tenants contribute through an additional charge on top of the base rent. These additional charges are typically known as service charges, maintenance charges, or additional rent.

The services covered by these charges may encompass:
  • Repairs and maintenance for the building.
  • Building management services.
  • Provision of concierge and warden services.
  • Insurance coverage.

Typically, when a landlord levies a service charge, the VAT liability aligns with that of the premium or rents due under the lease or license. These payments usually fall under VAT exemption unless the landlord has chosen to opt for taxation. In which case they are subject to standard VAT rates.

However, if services are rendered to a freehold owner of a building without ongoing supplies of accommodation to which the service charge can be tied. The charge is invariably subject to standard VAT rates.

Landlords may impose charges on their tenants for items beyond general services, typically falling into three categories:
  1. Additional payments for the primary provision of accommodation, following the VAT liability of that supply (usually exempt unless the landlord opts to tax).
  2. Supplies unrelated to accommodation (usually subject to standard VAT rates).
  3. Disbursements, which fall outside the scope of VAT.

If the landlord acts as the policyholder or rateable person, any payments made by tenants for insurance or rates are considered part of the primary provision of accommodation and are exempt from VAT unless the landlord opts to tax. However, if the tenant is the policyholder or rateable person and the landlord makes payments on the tenant’s behalf, these payments can be treated as disbursements.

If the phone account is under the landlord’s name, any charges imposed on tenants constitute payment for a standard-rated supply. This includes costs associated with calls, installation, and rental. Conversely, if the phone account is in the tenant’s name but the landlord settles the bill, it can be treated as a disbursement.

In cases where the landlord levies charges for the use of facilities like reception and switchboard services. Any payments made by tenants to the landlord are considered further consideration for the primary provision of accommodation.

Similarly, if the landlord imposes a separate charge for unmetered supplies of gas and electricity. It should be regarded as additional payment for the primary provision of accommodation. However, when these supplies are separately metered, charges to tenants constitute payments for individual supplies of fuel and power. Subject to standard VAT rates unless the supplied fuel qualifies for a reduced rate.

In instances where charges for the use of recreational facilities are mandatory, regardless of whether tenants utilize them. The VAT liability aligns with the primary supply of accommodation.