My client rents office space and their landlord charges them VAT. They have the whole of the first floor and are considering letting out a section of it to a third party. As they are charged VAT on the rent I imagine they should also charge VAT on rent to their tenant, is this correct?

There is a common misconception that if a tenant is charged VAT on their rent they must follow suit. It is the individual that decides whether to opt to tax any land or buildings. Your option to tax will not affect supplies made by anyone else. For example if you are selling an opted building the purchaser has the choice of whether to opt to tax or not. Similarly, if your tenant is sub-letting, they too have this same choice.

This is an important distinction, and will affect whether VAT charged by your client’s landlord is recoverable by them. The option to tax is a two stage process, first the decision to opt must be made, this may take place at a board meeting or similar, or less formally. However, the decision is reached HMRC advice that a written record is kept, showing clear details of the land or buildings you are opting to tax, and the date you made your decision. If previous exempt supplies have been made, you may need HMRC permission prior to opting (refer to Notice 742A, paragraph 5).

For your option to tax to be valid you must normally make your notification within 30 days of your decision, form VAT 1614A can be used (obtainable from HMRC website). If discrete areas of land are being opted it is advisable to send in a map or plan clearly showing the opted land with the notification.

Acknowledgement of your option to tax is normally make by HMRC within 15 working days, although this is not necessary for the option to have legal effect so the charging of VAT shouldn’t be delayed.

Without making an option to tax your client’s recovery of the VAT on their rent may be restricted according to the rules for partial exemption. Until they sublet they are able to recover VAT charged on rent by their landlord as a general overhead expense (provided the VAT registered client is a fully taxable business and doesn’t make any exempt supplies). Once they start to sublet they will making an exempt supply unless they decide to opt to tax their interest, if there is no option in place by them the VAT charged by their landlord relates to both their own taxable business and their exempt sublets; recovery may be restricted unless they meet partial exemption de minimise limits.

VAT rules for land and property transactions can be detailed and costly if ignored. Taxwise provide a VAT consultancy service at very affordable rates.  Please call 0844 892 5470 or email VATadvice@services-taxwise.com for a free no obligation fee quote.