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News - 2 January 2014

HMRC: The Let Property Campaign

HMRC uses campaigns to target specific taxpayer groups, the latest one is aimed at Residential Property Rental Income.

Although residential letting income is indeed exempt from VAT, it may have a knock-on effect in other areas.

Tonmoy Kumar, Manager of the Accounts Department of ABDS comments:
“It is worth remembering that it is the “person” and not the “trade” that is registered for VAT so any business activities carried on in the same legal entity that is registered for VAT is automatically part of that registration, therefore, if you have letting income as a secondary income stream it will form part of the VAT-registered business.”

This may well turn out to have beneficial side effects. There could, for example, be input tax on expenditure that was previously disregarded from VAT returns that may become reclaimable under the partial exemption de minimis rules; e.g. agents’ fees for rent collection services.

However, if the taxpayer operates the VAT Flat Rate Scheme [FRS], they could fall foul of the special rules for the Scheme and end up with a nasty and costly shock. Exempt income such as domestic letting rentals are included in turnover for FRS and the appropriate percentage must be applied to such income to produce a liability to VAT that would not normally exist.

One solution would be to remove the rental income from the VAT registered legal entity but this may not be possible or desirable for Tax or other commercial reasons. That leaves no alternative but to withdraw from the FRS and thus lose the simplification (and profit) benefits the Scheme brings. Once you withdraw from the FRS you cannot re-join for a period of at least 12 months.

Commercial property rental is also, by default, exempt from VAT unless the owner/landlord has exercised an Option To Tax the land/premises. The rental and upkeep of commercial premises will have higher costs so taxpayers may not be able to benefit from the partial exemption de minimis limits. It may well be the prudent option to have a valid Option To Tax in place, conversely, individual circumstances may determine whether it is better not to Opt To Tax, in which case partial exemption calculations should be scrutinised to ensure compliance with the rules to avoid assessments and penalties further down the line.

Property transactions, whether small or large, residential or commercial, can be fraught with complex VAT rules so as HMRC are focusing on the subject, why not take time to consider your own situation with letting income and contact ABDS to discuss how we can help in these matters.
ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail:

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