Partnership property income

VAT Question

My client is a VAT registered husband and wife partnership who run a plant and machinery hire business. 

In addition to the income received through the hire business they have, for the last couple of years, been receiving residential rental income from a buy to let property that they jointly own and this income has never been included in the partnership accounts as it has always been declared equally, 50/50, as property income in their personal tax returns.

However, they are now considering using this property as a furnished holiday let (FHL).

We are aware that the income from FHLs is standard rated but if they continue to split the FHL income equally, 50/50, within their person tax returns and not declared in any partnership tax return, would this income still be subject to VAT under their current VAT registration?

VAT Answer

Generally speaking, look at the actual legal ownership/interest in the property in order to decide who makes the supply of the property; the direct tax treatment of the income generated, or the percentage ownership of the property has no influence in this decision.

If more than 1 entity (person, company etc) own a building, no matter the percentage of beneficial interest, the entities are considered by HMRC to be in a partnership for VAT purposes in regard to the supplies made of that building.

Therefore, in regard to your new client, as the property is jointly owned by the husband and wife, the supply of the FHL accommodation using the property is considered to be a supply made by them as a partnership and as such, will automatically fall within their existing VAT registration.

As such they will have to account for VAT on their FHL income from the start.