Property Management Agency arrangements – are you getting it right for VAT?

Property Management Agency arrangements

As a young lad, my parents rented our TV, and so did all my friends along the street. A man used to come round to collect the rent each fortnight, and I thought he must be very rich to own all these…

I know now that he didn’t really own them, he just worked on behalf of the owner. But I still find myself thinking of those days all these years later.

We often get questions from clients who have engaged property management agents to take over the day-to-day management of their properties, including rent collection. But what are they supplying and to whom?

This is a common practice and one that you might have in your organisation, but how confident are you that the VAT is being treated correctly and accounted for in the correct VAT period?

Let’s start by looking at a typical arrangement between the landlord and its agent.

The agent will raise invoices to tenants for rent and service charges on behalf of the landlord. These invoices will be in the landlord’s name and show the landlord’s VAT details. If the landlord has opted to tax its interest in the building, VAT will be added to the rent and service charges.

If any invoices include VAT, who accounts for it?

Who must put the output tax on their VAT return, the landlord or the agent?

Any output tax on the invoices belongs to the landlord. Therefore, if VAT invoices have been issued, the VAT must be accounted for by the landlord and, importantly, in the correct tax period.

The landlord must ensure that the agent provides a breakdown of invoices raised in good time for the landlord to include the output tax in the correct VAT return.

Demands for payment

Some agents might not raise VAT invoices but send a demand for payment instead. This will delay the landlord’s requirement to account for VAT until the tenant makes the payment. When the tenant pays, the agent should issue a VAT receipt to the tenant, and the landlord should account for the VAT.

This procedure can be useful where there are likely delays in tenants paying their rent (as many landlords might have experienced during the COVID-19 pandemic). However, it does increase the administration for both the agent and the landlord; instead of raising all the rent invoices in one go, they might be raised across tax periods.

That’s rents covered, but what about services?

In addition to the rents, the agent might manage the services on the landlord’s behalf. Service charges are invoiced in the same way as rent (with the same VAT accounting requirements) but are often retained by the agent and used to pay for goods and services on the landlord’s behalf. What is often missed is that the landlord must account for VAT on the income even though the agent retains it.

Goods and Services – whose input tax is this?

VAT incurred on goods and services paid by the agent on the landlord’s behalf is the landlord’s input tax and can be recovered only by the landlord (if proper VAT invoices are obtained). The agent should send a breakdown of costs incurred and copies of VAT invoices so that the landlord can recover the VAT.

So that is a quick whistle-stop tour of the VAT treatment of Property Management Agency arrangements, but what happens if your organisation has got it wrong…

Getting it wrong…

We see two common errors on our VAT helpline. First, VAT was not accounted for at all on service charges or rents that the tenant had not yet paid. Secondly, VAT was accounted for late because it was not posted until the income was received, and it was not in the same VAT period as when the invoice was raised.

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Jon Guilliatt

Written by Jon Guilliatt

Jon has 27 years’ local authority accounting experience with East Lindsey District Council and City of Lincoln Council prior to joining PSTAX in July 2018. Jon’s role within PSTAX is as an Indirect Taxes Consultant dealing with VAT and SDLT. This mainly consists of VAT Helpline advice and Consultancy work. His experience heavily involves Local Government Reorganisations, Partial Exemption reviews and CCO Reviews.

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