How Can A Landlord Avoid Incurring VAT On Doubtful Rent?

VAT on unpaid rent: a problem for landlords

Many landlords of commercial property charge their tenants VAT on rent. Often landlords will demand rent from tenants in advance, at the beginning of the month, quarter or other period in respect of which the rent is payable.

If a landlord issues a VAT invoice to the tenant when demanding the rent in advance but the tenant does not pay the rent, for example because the tenant is in financial difficulty, then:

• The VAT rules still require landlord to account to HM Revenue and Customs ("HMRC") for VAT on the rent as shown in the VAT invoice even though no payment has been received from the tenant.
• Although the landlord may, in due course, be able to make a claim for VAT bad debt relief (to recover back from HMRC the VAT previously accounted for), the landlord will meanwhile be out of pocket in respect of the VAT.