As a landlord, you may be thinking “I don’t pay VAT on the rent I charge my tenants, so I can’t reclaim VAT on my rental expenses…” You may however be surprised to hear that this isn’t always the case, thanks to HMRC’s partial exemption de minimis rules for VAT.
Residential rental income is an exempt supply for VAT purposes, and so as a rule VAT cannot be charged on this income or reclaimed on related expenses. However, if you’re in a situation where you’re a landlord, but also run a VAT registered business making taxable supplies as a self-employed individual, then there may be a way you can reclaim VAT on your rental expenses too through your VAT Returns.
I’m VAT registered through my self-employment and a landlord – how much can I claim?
If this sounds like you, you could be missing out on underclaimed VAT of up to £7,500 per year!
This opportunity can be utilised as when you are VAT registered, HMRC look at all of your total income collectively.
Whilst rental income is exempt from VAT, under the partial exemption de minimis rules, you can reclaim the VAT on your rental expenses so long as the VAT amount is no more than:
- £625 per month on average
- 50% of the total VAT on purchases that all your businesses incur in the VAT Return period
Let’s look at an example…
Dan is self employed as a builder and is VAT registered and also owns a residential property which he rents out to a tenant. This rental income is VAT exempt. Typically, Dan incurs VAT of £400 per month (£4,800 per annum) on rental expenses such as repairs, agent fees and advertising. As this VAT falls below the threshold of £625 per month on average, he can reclaim all of it back on his VAT Return!
It’s also worth noting that if you are planning on registering your business for VAT, you’re able to claim pre-registration VAT on goods purchased up to 4 years prior and also on services used up to 6 months prior. Assuming the VAT de minimis rules were met during this time, you could benefit from a potentially unexpected reclaim of historic VAT on rental expenses!
VAT trap for the unwary landlord
The above is great news. But what happens if you are self employed and a landlord but you decide to use the flat rate scheme for VAT. This might be great for your self employment but unfortunately the flat rate gets applied to your rental income as well.
Let’s look at an example…
Mary is a self-employed author and is VAT registered. She also owns a residential property which she rents out. Mary’s turnover is £30,000 from her writing.
Under the flat rate scheme she will pay 12.5% VAT on her gross writing income, saving her £1,500 if you ignore VAT on expenditure. However Mary also receives £14,400 rental income. Unfortunately she wasn’t aware that exempt income is included as part of her flat rate turnover and VAT at 12.5% is therefore due on the £14,400 rents – i.e. £1,800. Mary is now £300 out of pocket but if you consider all the VAT she could have recovered on her business expenditure and using the de minimis rules for her property expenses she is significantly out of pocket!
In the above situation Mary should definitely move over to normal or cash accounting for VAT.
VAT for landlords can be problematical but we’ve highlighted in this article one big positive and a trap often overlooked. Whatever your circumstances if you are a landlord it is always worthwhile speaking to a professional advisor about VAT. You never know there could be a big VAT saving!!!
The content in this blog is correct as at 29 July 2022. See terms and conditions.