VAT on rental income
The recent VAT rate change has meant a number of changes in the treatment of rental income and leases.
The VAT rate to use for rental income is determined by the tax point, which for rentals is theearlier of the date on which a VAT invoice is issued or payment received. The VAT rate that is in force at the tax point will be the rate that applies. For example, if payment for rent was received on 30 November 2008 and a VAT invoice issued on 6 December 2008 the VAT rate to use would be 17.5%.
The change in VAT rate also alters the calculation of the Net Present Value (NPV) in situations where VAT is chargeable. Where the effective date of the grant of a lease is on or after 1 December 2008, NPV should be estimated using the new temporary rate of 15% from 1 December 2008 – 31 December 2009 and from 1 January 2010, 17.5%
This change also means that the NPV calculations which include VAT may result in small Stamp Duty Land Tax (SDLT) repayments. HMRC have estimated that based on an annual rent of £1million that the repayment would be less than £250. HMRC do not intend to make repayments before January 2010 unless the lease ends before the end of 2009.