The next step

Details of the HMRC concession

[Document]

Personal ownership of business premises - VAT problem?

Personal ownership

There are several reasons why you might want to personally own your business’s trading premises. These include where you intend taking on business partners and don’t want to give them a share of the property, or for a leased property the landlord wants a director’s or partner’s personal name on the lease to make it easier to enforce rent. Personal ownership might mean VAT paid on costs relating to the property can’t be reclaimed.

Basic VAT rules

A business is entitled to reclaim VAT only if it’s the person (“persons” for VAT purposes includes companies and partnerships) that receives a supply of goods or services. Therefore, supplies for the maintenance or improvement of a property are normally supplies to the property owner (freehold or leasehold). On the face of it it seems that personal ownership of a trading premises might prevent recovery of VAT on property-related costs, but that doesn’t have to be the case.

Freehold. If you own the freehold of the property, it’s relatively simple to ensure that VAT on repair and maintenance costs can be reclaimed by your business, presuming that it’s registered for VAT.

Tip. Draw up an agreement with your business making it responsible for the maintenance of the property. Where possible arrange for it to be billed for work directly so that all the paperwork is in its name. If that’s not possible ensure that the business pays the bill (or reimburses you) and that you pass the original bill for it to hold with its records. You should retain a copy.

Trap. VAT on the cost of improvements is a little trickier. As the freeholder you are the recipient of the supplies relating to the improvement even if your business pays for them. That means your business can’t reclaim the VAT.

Tip. The solution is to “opt to tax” the property if you haven’t already done so, register for VAT and charge the business rent. This can be a modest amount. You’ll have to charge your business VAT on the rent but it will be entitled to recover this, subject to the usual conditions. You can also charge it for any improvement works, again adding VAT which it can recover.

Note. If you run your business as a sole trader you won’t need to register if your business already is. If your business is run through a company you will have to register for VAT to follow the Tip above.

Leasehold. The position isn’t greatly different from owning the freehold. Making the business responsible for the repair and maintenance costs will allow it to recover the VAT paid on them. However, any VAT you’re charged on the rent you pay under the lease is, strictly according to the rules, not recoverable by your business even if it reimburses you or pays the rent. The position is similar to that for improvement costs where you own the freehold, but there’s a simpler solution.

Tip. You can take advantage of an HMRC concession that allows, providing conditions are met, for your business to recover the VAT charge on the rent due from you without requiring you to register for VAT and charge your business rent (see The next step ).

For details of the HMRC concession, visit https://www.tips-and-advice.co.uk , Download Zone, year 24 issue 9.