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Is VAT payable on the full rental amount received by an estate agent?

Tuesday, 12 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q1: My client is an estate agent and rents out a commercial building on behalf of the owner. Should VAT be charged on the entire rental amount when invoicing the tenant?

A1: It is not clear what you mean with ‘on the entire rental amount’ and there are a number of possibilities.  We assume that you want to invoice the rental amount on behalf of the client.  We submit that the supply is really being made by the owner of the building and we accept that the owner is registered as a vendor.  If our assumptions are wrong the guidance may not be appropriate.  You are welcome to provide the additional detail – which will be evident from the guidance that follows. 

The Act allows for an agent to issue the tax invoice on behalf of the principal – section 54.  We copy the relevant part here for convenience sake:

"…where an agent makes a supply of goods or services for and on behalf of any other person who is the principal of that agent, that supply shall be deemed to be made by that principal and not by that agent: Provided that, where that supply is a taxable supply and that agent is a vendor, the agent may, notwithstanding anything to the contrary in this Act, issue a tax invoice or a credit note or a debit note in relation to such supply as if the agent had made a taxable supply, and to the extent that that tax invoice or credit note or debit note relates to that supply, the principal shall not also issue a tax invoice or a credit note or a debit note, as the case may be.” 

As we don’t know the nature of the agreement between the estate agent and the owner we can’t comment on whether or not the agent will be making a supply for and on behalf of the principal of that agent. 

The commission that the agent will be entitled to will be invoiced by the estate agent to the owner as that is the supply the agent makes (possibly the only supply). 

Q2: The rental agreement is between the owner and the lessee. The estate agent merely manages the rental on the owner’s behalf.

The estate agent and the property owner are registered for VAT. Is it correct to interpret the Act as saying that the commercial rental will attract output VAT, payable by the estate agent?

And then from a practical point of view, the property owner will need to invoice the estate agent for their portion of the rent to be paid out?

A2: You are correct that ‘commercial rental’ (being a supply of property which is not an exempt supply or a supply of commercial accommodation) will be a taxable supply.  This assumes that the supplier is registered (or required to be registered) as a vendor.  We don’t agree that there is a supply between the land owner and the agent – you confirm that when you say that the agreement is between "the owner and the lessee” and that the "agent merely manages the rental on the owner’s behalf”.  We submit that the supply (in respect of which the rental is received) is made by the owner of the property and not by the agent. 

We assume that when you refer to "portion of the rent to be paid out” you mean that the agent collects the full rental (inclusive) from the tenant and then deducts their commission (inclusive) before the balance is paid over to the landlord.  The only invoice necessary here is the invoice from the agent to the owner for the agent’s fee. 

As Judge Nugent (in the British Airways case) said:

"The services that passengers enjoy are supplied by the company and the tax accrues in terms of s 7 (and is payable by the vendor of the service) when that supply occurs. A further tax does not accrue when the vendor of another service (British Airways) does no more than bring to account and recover the charge that it was required to pay for the supply of that service by the company (whether it is supplied to the passengers themselves, or to the airline for the benefit of its passengers). The moneys that are recovered by British Airways are not a consideration for the supply by it of airport services simply because it does not supply them at all.” 

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision. 



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