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VAT on unpaid rent: a problem for landlords

A landlord may issue a VAT invoice to the tenant when demanding the rent in advance however what if the tenant does not pay? For example, because the tenant is in financial difficulty, then:

>> The VAT rules still require the landlord to account to HM Revenue & Customs (HMRC) for VAT on the rent as shown in the VAT invoice even though no payment has been received from the tenant.

>> Although the landlord may, in due course, be able to make a claim for VAT bad debt relief (to recover back from HMRC the VAT previously accounted for), the landlord will meanwhile be out of pocket.

>> Where the landlord has obtained VAT bad debt relief on unpaid rent and the tenant (or perhaps its administrators) subsequently pays some or all of this rent, then part of the VAT bad debt relief previously obtained will have to be paid back to HMRC.

Fortunately, however, in respect of a tenant whose ability and/or willingness to pay rent appears to the landlord to be somewhat doubtful, the landlord can both (1) avoid having to account to HMRC for VAT on the rent before the tenant pays and (2) avoid the need to claim VAT bad debt relief on unpaid rent.

Special VAT rules for rent payable under a lease of real property

There are special VAT rules for rent payable under a lease, which are significantly different from the normal VAT rules. In particular, under these special VAT rules, the only triggers for the landlord incurring VAT on the rent are either:

>> Issue of a VAT invoice in respect of the rent; or
>> Receipt by the landlord of rent from the tenant.

Neither the landlord’s making the premises available to the tenant nor the tenant’s occupation and enjoyment of the premises will, of themselves, trigger any VAT liability for the landlord in respect of the rent. The due date for payment of rent is also, of itself, not a trigger.

Using the special VAT rules: issue by landlord of ‘non-VAT’ invoice

Where there is a material doubt whether the tenant will pay all or some of the rent by the due date for payment, there is a simple solution for the landlord, namely:

>> When the landlord issues (in advance) its demand for rent, the document issued by the landlord states expressly on its face “this is not a VAT invoice” and some key requirement for a valid VAT invoice is intentionally omitted (typically, the landlord’s VAT registration number). The demand should, however, still show as payable the correct amount of VAT on the rent;

>> If (but only if) the landlord receives some or all of the rent from the tenant, then the landlord issues a formal valid VAT invoice to the tenant in respect of the precise amount received.

Practical points

The landlord will need to explain the new invoicing arrangements to the tenant. However, provided the landlord issues its formal VAT invoice promptly after receiving rent from the tenant, both landlord and tenant should nd the arrangements relatively simple to operate.

The suggestion above involving non-VAT invoices only works because of the special VAT rules that apply in respect of rent payable under a lease of real property; issue of “non-VAT” invoices will not generally work to avoid incurring VAT in respect of supplies of other goods and services.

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It is well known that Stamp Duty Land Tax (SDLT) is payable on rent and also on premiums. But, it is less well known that SDLT may be payable on rent deposits if they are regarded as ‘hidden’ premiums.

Rent deposits will be subject to Stamp Duty Land Tax:

(a) on the grant of a lease, where the amount of the deposit is more than twice the highest amount of rent payable in any one year period during the first five years of the term; or

(b) on an assignment, where the deposit is more than twice the highest amount of rent in any one year period during the first ve years of the term remaining following assignment.

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