October 29th, 2012 / Insight posted in

Must I charge VAT on sublet rooms?

NN writes: Our spa has surplus capacity and we would like to rent out rooms to complementary therapists. We will charge a 40% commission or a fixed rental for the room. We plan to take the full payment from the client through our books and then pay the therapist. Presumably we do not have to pay VAT on rental income from these rooms?

Given that the therapist will not be Vat-registered, we are looking to avoid Vat where possible without running into trouble. The Vat treatment will depend on the arrangement with the therapist, writes Jon Sutcliffe, a partner at Kingston Smith LLP. Where you are receiving the 40% commission, you are acting as an agent and can pass on the gross amount to the therapist. You are providing the therapist with a service, which is subject to Vat. So you will charge the therapist 40% and this will be inclusive of 15% Vat.

The position for charging a therapist rent is different. When renting your premises you can decide whether to opt to tax your rent. If you decide to tax your rent and you have incurred substantial Vat costs on the fit-out of the premises, you would be able to recover these. If you do not opt to tax your rent, the rental income would be Vat exempt. This would cause your business to become partially exempt for Vat purposes.

You are likely to have minimal inputs that are liable to Vat, so you could treat the rent as exempt, with no real adverse effect – in other words, you won’t charge the therapists any Vat on the rent.