I have just taken a lease on a shop. As part of the agreement I have lodged a deposit of six months rent + VAT which is to be held by the landlord's solicitor for the duration of the lease (five years). Obviously, I would like to recover the VAT element on my next return but am not sure whether I'm entitled to do so.
Unfortunately, you won't be able to reclaim VAT on the rent deposit. The landlord isn't actually charging you VAT on the deposit, they just want a security deposit equivalent to six months rent plus VAT.
In technical terms, payment of the deposit is not consideration for a supply so a tax point for VAT purposes is not being created. Section 14.2.3 of VAT Notice 700 runs through this.
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Pearce & Co - Chartered Accountant and Chartered Tax Adviser
What happens when the lease is in the last 6 months and they use the deposit as rent? can VAT be claimed back then and how would you do this if so? or if the deposit is returned is it 6 months rent plus VAT?
If the landlord uses the deposit as rent in the last six months, then they should still issue the tenant with a VAT invoice for that period. The tenant can then reclaim the VAT on the invoice in the normal way.
If the landlord returns the deposit at the end of the lease, this should have no VAT implications for the tenant. It is simply the return of a security deposit that just happens to be equivalent to six months rent plus VAT.
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Pearce & Co - Chartered Accountant and Chartered Tax Adviser
