VAT on ground rent

[rbailey28]

My wife and I own a leasehold hotel room. We are entitled to receive the net profits of our room but have to pay ground rent from this when a distribution is made. The Lease states that ground rent is payable (inclusive of VAT, if applicable). When we received our first distribution a self billed invoice was raised showing the net VAT exclusive income of the room with a deduction of ground rent and 20% VAT was added to this net distribution. We assume that the seller was obliged to register for VAT as his income exceeds the VAT registration threshold and therefore VAT is applicable. It seems to us that the seller should only deduct the VAT exclusive ground rent. Who is correct, the seller or us?

To us, it appears that we are having to pay the VAT but the seller is reclaiming the VAT on the ground rent and that also we are claiming VAT on VAT when we file our VAT Return.

[les35]

It depends! On the wording of the contract, perhaps on whether there is an Option to Tax, although this may not be required if the underlying supply is one of hotel accommodation (Is your room in a block with other rooms?).
I would expect you to receive the profit (including VAT) for the room, less expenses (including VAT). But you should let your Accountant look at the self-billed invoice, with the contract, to double check.

[rbailey28]

Yes, my room is one of 204 in a four storey Hotel. The self billed invoice shows ex vat room income less ex vat expenses less vat inclusive ground rent. 20 % VAT is then added to this. The lease states that a VAT invoice for ground rent should be supplied to me rather than having the amount deducted on the self billed invoice although in practice they do deduct the ground rent from my distribution as opposed to me paying it directly. In my opinion, if they don't supply me with a vat invoice for the ground rent, then they should only deduct the ex vat ground rent. Failing to do either seems to me to be unjust enrichment. your further comments would be appreciated.

[section 44]

The Lease states that ground rent is payable (inclusive of VAT, if applicable).

Is this really what the lease says? It doesn't make sense.

[rbailey28]

It does sort of make sense. I think everything is sorted out now with the errors in accounting having been recognised by the Hotel accountant. The developer sold his reversionary rights in December to a newly set up company in the IOM. They were not required to register for VAT initially. Basically the wording has been interpreted as leaseholders having to pay the ground rent of £995 each whether or not it is VAT inclusive. The accountant has now issued two invoices, the first a VAT invoice and the second a non VAT invoice. Another self billing VAT invoice now needs to be raised for the amount of ground rent deducted plus VAT.