If you are a VAT registered business, you are most likely making taxable supplies and charging VAT at the standard reduced or zero rate and reclaiming the VAT incurred on your expenditure.

If you are making only exempt supplies, such that you cannot charge VAT, incurred VAT cannot be reclaimed either. This appears simple.

But what about if the business is making both taxable and exempt supplies? Are you aware of the partial exemption rules? Have you unwittingly become partially exempt?

A recent experience of mine with a client that has for years been trading and making taxable (“VATable”) supplies, charging VAT and reclaiming all input VAT. They decided to sublet part of the property occupied by their business.

Strictly, as the property was not ‘opted to tax’ by the company, it could not charge VAT on the rents opting properties to tax is a complicated area that I will not go into detail about here, but put simply, not ‘opting to tax’ the property for VAT, means that the company cannot charge VAT on the associated rentals. The VAT status of the property in the heads of the landlord I separate to that of the tenant and the landlord’s option, (if any) does not determining the VAT status in the hands of the company sub-letting.

By virtue of making these exempt rental supplies, the company has unwittingly become VAT partially exempt, and could therefore not necessarily reclaim all the VAT it had itself been charged by the landlord on the rents of the same property.

For the partially exempt business there are rules regarding what can be reclaimed. This can become complicated where there are costs relating to both the VATable and exempt supplies.

HMRC has put in place a broad set of principles to help simplify the process, and where the VAT attributable to exempt supplies is minimal, and below a certain limit, it can be reclaimed in full.

To summaries you should consider all the activities of the business, including those ancillary to the main supplies such as rental. A partial exemption calculation should be made where applicable to ensure the company is meeting its complicated requirements in this regard.

VAT on land and buildings can be complicated and decisions made (or not made) incorrectly can often not be resolved after the transaction has taken place. We would always recommended taking advice before entering into any property transaction such as buying, letting, developing or selling property.

We have VAT expertise at Barnes Roffe and if you need future information, please contact us.

Blog written by Ricky Downey