Rent received on residential property is exempt, which means that landlords of residential properties do not have to charge VAT and consequently they do not have to register for VAT; and they cannot reclaim VAT they have spent on their residential properties.
However in certain circumstances it may be possible for landlords of residential properties to reclaim VAT, this will occur where the landlord is registered for VAT because they have a another business which is standard rated for VAT (ie a normal business).
A VAT Registration covers all the activities of the person registered. So if someone has both a standard rated business, and rental income from residential properties, then they are a partially exempt trader, and there is a de minimis rule that applies to all partially exempt traders.
De Minimis Rule for Partially Exempt Traders
HMRC has introduced two simplified tests to confirm de minimis status.
If, in a VAT period, you pass Test One or Test Two you may treat yourself as de minimis and provisionally recover input tax relating to exempt supplies.
You’re still required to review your de minimis status at year-end as before and account for any under or over recovery of input tax as part of your annual adjustment. The simplified tests are:-
Test One
Total input tax incurred is no more than £625 per month on average and the value of exempt supplies is no more than 50% of the value of all supplies.
Test Two
Total input tax incurred less input tax directly attributable to taxable supplies is no more than £625 per month on average and the value of exempt supplies is no more than 50% of the value of all supplies.
‘Total input tax’ excludes blocked input tax (such as VAT on the costs of business entertainment) which is irrecoverable.
‘The value of all supplies’ includes taxable supplies made in the UK, supplies made outside the UK which confer the right of recovery and exempt supplies.
For further information see HMRC VAT Notice 706