Q&A: property rental tax points and unpaid rents
12 May 2020
In our regular Q&A series from Croner Taxwise, VAT adviser, Tony Chamberlain explores the tax implications of deferring rent payments during the Covid-19 pandemic
12 May 2020
Q. My client owns a commercial rental property that they have opted to tax, therefore charging VAT on the rents. One of their tenants, an unconnected third party, who holds a three-year lease has been severely affected by the Coronavirus outbreak and is struggling to meet this quarter’s rent payment. My client is concerned that because they have issued a request for payment at the beginning of the quarter, they must still pay the VAT to HMRC, even if they allow their tenant to defer the payment for the time being?
A. As the tenant holds a lease less than 21 years, this is a supply of services. It falls under the definition of continuous supplies of services and is covered by Regulation 90 of the VAT Regulation 1995. The tax point for such supplies will be the earlier of receipt of payment or issue of a valid VAT invoice. This regulation is summarised in VATTOS9155.
You stated your client had issued a request for payment at the beginning of the quarter and that is why they are concerned they must now pay over any VAT due for that period. However, HMRC’s own guidance confirms that issuing a request for payment that falls short of being a VAT invoice, does not create a tax point (see VATTOS9165).
This helps businesses who make continuous supplies of services to legitimately delay the tax point until the date they receive actual payment, so their cash flow is not adversely affected.
It is important to note there are some restrictions to delaying invoicing which are covered by the annual tax point per Regulation 94B of the VAT Regulations 1995. However, this regulation does not cover your client’s supply to an unconnected third party.
The final thing to check with your client is that they haven’t already issued what is referred to as a ‘period VAT invoice’.
This is an invoice that is normally issued upfront for continuous supplies covering up to a year and is common for supplies where regular repetitive invoicing would otherwise be needed, for example, monthly direct debit payments for a lease.
The tax point here is the earlier of when payment is received, or crucially in your client’s case, falls due. Therefore if they have issued this type of invoice at the start of the 12 month period, then a tax point would be created each time payment is due, whether or not it is actually paid – this would mean your client would have to pay the VAT over to HMRC and would have to wait another 6 months to be able to recover any VAT on unpaid rent using the bad debt provisions.
Period VAT invoices are covered in VATTOS5220 and cover supplies made under Regulations 85, 86 and 90 of the VAT Regulations 1995.
About the author
Tony Chamberlain, VAT adviser at Croner Taxwise, tel: 0844 892 2470
This article first appeared on Croner Taxwise