Is landlord correct to charge VAT on rent invoices?

Input tax claims

The legislation is clear that you can only claim input tax if your suppliers have correctly charged VAT in the first place. If a supply of goods or services is either zero-rated, exempt or outside the scope of VAT, then you cannot claim input tax, even if you have received a tax invoice from your supplier which shows both their VAT registration number and a charge of 20% VAT.

Example. A VAT-registered tax advisor has purchased a technical book from a publisher for £100 plus £20 VAT. The advisor cannot claim input tax because books are zero-rated.

Tip. If you are incorrectly charged VAT by a supplier, you should ask them for a VAT credit to correct the situation.

Have they opted to tax?

If your landlord is charging you VAT on your rental payments, they must have made an option to tax election with HMRC on the property in question. You should ask them for written proof that the election was made with HMRC, i.e. to confirm that VAT is being correctly charged.

Since February 2023, HMRC has stopped issuing option to tax receipt letters to landlords making an election, but it still issues automated response emails to confirm the notification has been received. Your landlord should be able to produce these email responses as evidence of their election if it was notified to HMRC after this date.

The automated email should quote the property address and postcode in the header, so it is important that you check that it relates to the building you are renting.

Insurance

Many landlords issue a separate annual invoice to charge the cost of insuring a building to their tenants. The lease or rental agreement will usually make it clear that your landlord has the right to make this extra charge to your business. Even though insurance services are exempt from VAT, they are only exempt when recharged by the landlord if the policy is in the name of the tenant; otherwise, the payment to your landlord is for extra rent and not insurance.

Example. Larry owns the freehold of a warehouse and pays £10,000 building insurance each year to Aviton Insurers. The policy is in his own name, but the rental agreement means that the premium can be recharged to his tenant. If Larry has opted to tax the building, the charge to the tenant will be classed as extra rent and he will charge £10,000 plus VAT.

Dilapidation payments

When you exit the building at the end of your rental period, there is often a clause in the agreement that means your landlord can charge you for corrective works needed to restore the building to the same condition it was in when you took occupation. This charge is usually referred to as a “dilapidation payment” or “want of repair”. Even if your landlord has opted to tax the property, they should not charge you VAT because it is a compensation payment. There is no supply of goods or services from the landlord to your business.

If the landlord insists on charging you VAT, refer them to HMRC Notice 742, para 10.12.