Should I be registered for VAT?

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If you are only letting out non-holiday residential property and you only have PAYE income and/or investment income you cannot register for VAT.

Is VAT charged on rental income in the UK?

Income from residential property except furnished holiday lettings is exempt from VAT. Income on commercial property is also exempt from VAT, unless you provide a service or you opt to tax.

If you are trading as a sole trader or in a partnership (which may be with your spouse) and own your rental property in the same capacity, then your rental property may affect whether you should be registered for VAT.

You must register for VAT if the turnover from your trade plus rent from your commercial property where you have opted to tax plus income from furnished holiday lettings in the last twelve months exceeds the registration limit which is £85,000 from 1st April 2017. It may be advantageous for you to voluntarily register for VAT depending on the type of property described below:

Commercial property

If you buy a new commercial property then you will have to pay Value Added Tax on the full purchase price. You may have to pay VAT on a second-hand property. Rents on commercial properties are exempt from VAT (provided that you do not provide a service) unless you make an election opting to tax. If your tenant is registered for VAT and makes only standard-rated supplies, then there is no loss to them (other than cash flow) if they have to pay VAT on the rents which you charge.

You can then claim the VAT which you have suffered on the building along with any expenses which you incur. If your tenant is not VAT registered or makes exempt supplies, this may influence your decision. More information on opting to tax can be found in Notice 742A Opting to tax Land and Buildings produced by HM Revenue and Customs.

Furnished holiday lettings

Furnished holiday lettings are considered to be a standard rated* supply for VAT. This should not be an issue unless you also have other taxable supplies in the same legal capacity or the gross income is more than £85,000. So if you and your spouse were in a VAT registered business partnership and also owned the property jointly, you would have to account for VAT on the holiday letting income but you would be able to claim any input VAT on the expenses.

If however, you were a sole trader registered for VAT and you owned the property jointly with your spouse then the furnished holiday letting income is received in a different capacity so VAT should not be an issue.

If you are not registered for VAT and your supplies including the holiday letting income exceeds the VAT registration threshold (currently £85,000) in any 12 month period, then you would need to register for VAT and charge VAT at 20%* on your holiday rentals.

*Owing to the Covid 19 crisis, there is a special reduced rate of VAT of 5% for supplies made in the period 15th July 2020 to 30th September 2021 and 12.5% for supplies made in the period 1st October 2021 to 31st March 2022 when the rate reverts to 20%.

Other residential property

If you buy a new residential property then it will be zero-rated for VAT purposes. Otherwise, the purchase will be exempt.

If you are providing a service, for example, food and drink, then the supply will be standard-rated but it is more likely that this income will be treated as trading income rather than income from the property.

Generally, rents of residential accommodation are exempt from VAT. This does give a planning opportunity to make use of the partial exemption de minimis rules if you also make standard rated supplies. The property owner must be the trader, so if it is a jointly owned property, then the VAT trade must also be a partnership of those individuals.

Provided that the input VAT on the expenses for your property income and any other exempt income is 1) less than 50% of your total input VAT and 2) less than an average of £625 per month then you can claim all the input VAT including that suffered on your rental property. Remember that if you do claim the VAT then the expenses which you claim for income tax purposes must be net of VAT.

Making Tax Digital for VAT

All businesses which are registered for VAT no matter how much their turnover are required to keep digital records and file their VAT returns digitally.

You can apply for an exemption where it is not reasonable or practical for you to use computers, software or the internet to follow the rules for Making Tax Digital for VAT. This could be because of age, disability, where you live, religious grounds or any other reason where it is not reasonable or practical. Where the exemption is not available or you have not applied for it, you must keep digital records using either dedicated software or a spreadsheet with appropriate bridging software.

FAQs

Q: Can I be VAT registered as a sole trader?

A: As a sole trader, whether or not you need to register for VAT depends on your specific circumstances. Here’s some information regarding VAT registration for sole traders:

– If your annual turnover (the total value of your taxable supplies) exceeds the VAT registration threshold, which is £90,000 from 1st April 2024, you are required to register for VAT. You may deregister for VAT if your taxable turnover goes below £88,000.
– If your turnover is below the threshold, you have the option to voluntarily register for VAT. This can be beneficial if you want to reclaim VAT on your business expenses or if you believe that being VAT registered will enhance your business credibility.
– It’s important to note that if you are only letting out residential property and have PAYE income or investment income, you cannot register for VAT.

Q: Is it worth being VAT registered as a sole trader?

A: Registering for VAT as a sole trader depends on various factors and individual circumstances. Here are some points to consider:

– If you are only letting out residential property and your income consists solely of PAYE income or investment income, you cannot register for VAT.
– VAT registration may be beneficial if you have a significant amount of taxable supplies and want to claim back VAT on your business expenses.
– Registering for VAT means you will need to charge VAT on your goods or services, which can affect your pricing and competitiveness in the market.
– VAT registration also comes with additional administrative responsibilities, such as keeping VAT records, submitting VAT returns, and potentially undergoing VAT inspections.

Q: Do I need to charge VAT as a sole trader?

A: You can only charge VAT if you are registered for VAT. You must register for VAT if your turnover is over £90,000 from the 01st April 2024. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.

DISCLAIMER
© Thandi Nicholls Ltd 2024 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S Thandi or M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.