Residential letting is exempt from VAT. Landlords are unable to register for VAT if they only make exempt supplies.
However, if the landlord separately has a VAT registered business, they may be able to reclaim VAT on expenses such as letting agent fees and maintenance: up to £7,500 of VAT can be reclaimed in a year under the VAT partial exemption rules.
VAT registered businesses which are partially exempt are entitled to reclaim input tax in relation to exempt supplies provided that either:
- Total input tax is no more than £625 per month on average; or
- Total input tax not directly attributable to taxable supplies is below both £625 per month on average (£7,500 per year) and 50% of total input tax; or
- Total input tax directly attributable to exempt supplies is no more than £625 per month on average and no more than 50% of total input tax.
Non-residential letting is also exempt, but it is possible for the landlord to exercise an ‘option to tax’ the property, in order to reclaim VAT on the cost of buying and improving it. VAT is in turn charged on the rental of that property.
- The option is unilateral, and personal to the owner. A previous owner opting to tax the same land does not bind the current owner.
- There are rules about the physical scope of the option – it is not possible to opt to tax only part of a building.
- Supplies of some types of land, such as residential land, can’t be taxed under the option.
- The option can only be exercised from a current date and needs to be notified to HMRC within 30 days.
- Permission may be required from HMRC if the owner has previously made exempt supplies.
- An option can sometimes allow recovery of past as well as future input VAT.
- The option is irrevocable for at least 20 years in most circumstances.