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Review Your SQE 1 Practice Records

Examination Timing: 00H00M02S

Mr. Green owns the freehold of a commercial building and intends to grant a lease of the building to BlueSky Insurance Company. Mr. Green is registered for Value Added Tax (VAT) and, prior to granting the lease, exercises an option to tax the building. BlueSky Insurance Company makes only exempt supplies for the purposes of VAT in the course of its business. 

What effect does Mr. Green’s option to tax the building have on the rent payable to him by BlueSky Insurance Company?

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When Mr. Green exercises an option to tax the building, the rent payable becomes subject to VAT at the standard rate of 20%. Since BlueSky Insurance Company makes exempt supplies for VAT purposes, it cannot recover the VAT charged on the rent. As a result, the VAT will be an additional cost to BlueSky Insurance Company, making the rent effectively higher by 20%. 

Key Point: Exercising an option to tax a property means that VAT will be charged on rental income from that property. Businesses making exempt supplies, such as insurance companies, cannot recover this VAT, leading to an additional financial burden. Understanding the implications of VAT on property transactions is essential for effective financial planning and compliance with tax regulations.

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