Incorrect VAT Costs Barrister Landlord a Bundle

VAT is a simple tax in principle, but it has many complexities. One that is frequently encountered by landlords is what the correct VAT treatment should be when services are provided to tenants under their leases.

Rent is an exempt supply for VAT purposes, unless the landlord has exercised the ‘option to tax’ the rental income on a property, in which case the rent is standard-rated.

However, a landlord often supplies other services, such as insurance, water and electricity. None of these is standard-rated as a stand-alone supply. Issues can arise when supplies are ‘mixed’, and VAT law has a preference for treating ‘bundles’ of supplies as a single supply where splitting them would be ‘artificial’. When a mixed supply is deemed to be a single supply, the predominant supply will determine the VAT rate charged.

The sort of problem that can arise is illustrated by a recent case in which HM Revenue and Customs (HMRC) realised that the landlord of the Middle Temple in London was supplying cold water to its barrister tenants without charging VAT. The supply of cold water as a stand-alone supply is zero-rated. The rents, however, were standard-rated. HMRC sought payment of VAT at the standard rate on the value of the cold water supplied.

The landlord claimed that there were two separate supplies – the premises and the cold water. HMRC argued that there was a single supply, because the tenants had, in practice, no choice of supplier of water and the tenants’ premises were not usable without a supply of cold water.

In accepting HMRC’s contentions, the Upper Tribunal laid out careful guidance on how such mixed supplies should be treated.