Multiple Rent Clauses – What About the VAT?

Tenants of commercial premises know that rent is not a taxable supply for VAT purposes unless the landlord has elected to waive the VAT exemption in respect of the premises. However, there are other sorts of supply (such as cleaning) that are, in principle, taxable supplies and thus subject to VAT.



Whether or not such supplies will carry VAT depends on a number of factors. This is important because VAT charged by the landlord will not be able to be recovered by the tenant if it is not VAT registered.



Recently, a case on this point was heard. The nub of the argument was that the landlord supplied services in addition to the rental of the building. The tenants had to buy these from the landlord and they were payable as separate charges by the tenants. One of the charges was for insurance (which is a supply that is not subject to VAT) and one was for ancillary services such as water, heat, cleaning and maintenance etc. VAT was not charged by the landlord for these.



If any of the charges were not paid, the landlord had the right to terminate the lease.



One of the tenants argued that these supplies were separable and thus should carry VAT. Had this been accepted, the practical effect would be that the landlord would have to account for output VAT on the value of the services supplied to the tenants (the amount charged is, in these circumstances, treated as being the ‘gross of VAT’ amount) and those tenants who were VAT registered would be able to claim a deduction for input VAT.



Although it is usual for multiple supplies provided ‘as a bundle’ to be separated for VAT purposes, this is not always the case. In some instances, it is necessary to consider the supplies to be a single transaction, and in such cases, it is the principal or dominant transaction that determines the VAT status.



In this case, the Court of Justice of the European Union (CJEU) considered that the exclusive right to supply by the landlord and the ability of the landlord to terminate the lease if any of the charges were not paid meant that the supply was a single supply and not subject to VAT. The ancillary services could not be supplied to the tenants in the absence of the lease, which also pointed to the supply being a single supply.



However, the CJEU stopped short of talking in terms of a general rule and concluded that each case must be decided on its own facts.