Q: I rent two floors of a building for my design business and there are similar businesses in the other parts of the building. Each tenant rents directly from the owner of the building who doesn’t charge VAT on the rent. He has not opted to tax the building, but he invoices separately for bills, such as gas, electricity, business rates, insurance and general upkeep of communal areas. Some of these have VAT on and some don’t. Shouldn’t the treatment be consistent?
A: Service charges for commercial buildings are sometimes for separate supplies with their own VAT liability and sometimes treated as additional consideration for the building so that the treatment follows that of the rent.
For business rates it depends on who is the rateable person; if this is the landlord and he simply recharges a share to each tenant to cover his outlay, with or without a profit element, then it is treated as additional consideration for the building and follows the rent. Hence a charge for ‘Rates’ could be exempt or standard rated depending on whether a landlord had opted to tax.
The same rule applies to insurance where the landlord is the insured person and he simply passes on a share of the cost to the tenants; this is commonly the case with a landlord’s buildings insurance.
Gas and electricity are treated as separate supplies either at the standard or reduced rate (depending on usage) where each tenant has a separate meter. However, if they are not separately metered, the onward charge is additional consideration for the building.
Where, under the terms of the lease, a service charge is imposed to cover to cover the upkeep of communal areas, this follows the treatment of the rent. However, if a tenant pays to have specific work done to his designated part of the building such as cleaning or decorating, this will be a standard-rated supply.
In association with Croner Taxwise
Image designed by Freepik
Click here to download our book 71 Ways to Pay Less Tax