If you use an agent to manage a let property, they may incur expenses, such as repairs and cleaning costs, on your behalf and recharge these to you.
Where this is the case, will you need to pay VAT on those expenses?
Recharge or disbursement?
Where costs are incurred by the agent and passed onto the landlord, it is necessary to determine whether the cost is a recharge or a disbursement. This is an important distinction as the VAT treatment differs.
A payment made to a supplier on behalf of a customer is called a disbursement. This would be the case, for example, if the letting agent arranged for a plumber to repair a shower in a let property and paid the repair on the landlord’s behalf, passing the cost onto the landlord.
The letting agent does not need to charge VAT when passing on the cost of the disbursement to the landlord – it is the landlord rather than the customer who receives the service.
For a payment to qualify as a disbursement, all of the following conditions must be met:
the letting agent paid the supplier on the landlord’s behalf and acted as the agent of the landlord;
the landlord received, used or had the benefit of the goods or services paid for on their behalf;
it was the landlord’s responsibility to pay for the goods and services not the letting agents;
the letting agent had the landlord’s permission to make the payment;
the landlord knew that the goods and services were from another supplier not from the letting agent;
the costs are shown separately on the statement/invoice;
the exact amount paid to the supplier is passed on to the landlord; and
the goods and services paid for by the letting agent are paid for in addition to the agents own services.
Jane uses a letting agent to manage her buy-to-let. The tenants report a problem with mice. The agent contacts Jane to advise her and she ask that they sort the problem on her behalf. The agent gets a quote from a pest control specialist for the work, which is £180. Jane agrees the quote.
The work is carried out. The bill is paid by the letting agent and passed on to Jane (being deducted from her rental income for the month). The payment is a disbursement so the letting agent does not need to add VAT to the amount passed on to Jane. The amount paid on Jane’s behalf of £180 is deducted from her rental income for the month.
By contrast, a cost that is incurred by the letting agent that is recharged to the customer must be included in the VAT charged to the landlord. This will apply to incidental business expenses and costs incurred by the letting agent. Examples would be services provided by the letting agent, for example cleaning and gardening, and recharged travel expenses for visits to check on the property.
The letting agent can reclaim any input VAT incurred on these costs, but must charge VAT on the amount charged to the landlord.
The letting agent incurs travel cost of £20 when visiting a landlord’s property to carry out a viewing. The letting agent recharges the cost to the landlord. The letting agent (who is VAT registered) must charge VAT in the recharged expense.