Disbursement: are landlords and their managers missing a VAT trick?

Many residential landlords use property managers to manage their properties, which can remove a great deal of administrative stress and burden for a small cost. But many may wish to check that their arrangements with managing agents are VAT efficient, as they may be paying too much VAT: disbursement could be a better way to process third-party costs.

Residential property rent is VAT exempt, so landlords will not usually be VAT registered regardless of the size of their portfolio or the rent income they receive. This means that any VAT incurred in relation to the management of these properties is irrecoverable. This includes the agent’s fees and any repairs or renovations to the property.

There are two ways an agent can deal with the invoicing of these costs. Firstly, it can absorb any third-party costs (such as repairs and general upkeep) and then recharge this to the landlord as part of its overall fee.

The second method is to pay the third-party costs as an agent of the landlord (from the landlord’s account) and then recharge these as a disbursement, so the income and expenditure costs pass through the agent. Using this method, VAT is only charged on the property manager’s fee and not the original third-party cost (which is passed over as a gross cost).

We have recently seen a number of agents adopting the first type of treatment, which they are perfectly entitled to do. However, this treatment is not efficient where the third-party tradespeople involved are not VAT registered. (This is often the case as a lot of tradespeople’s income is below the current VAT threshold of £85,000.)

Example: the difference disbursement can make

The example below illustrates the potential difference the disbursement treatment can make where non VAT registered tradespeople are used.

In the above example, the landlord saves £100 in VAT payments; the property manager and tradesperson are unaffected.

Property managers who have clients who are not VAT registered (particularly the residential sector) should consider their procedures and review whether this alternative accounting method might save their clients some money in a sector where margins are very tight.

Both methods are endorsed by HMRC and no prior agreement is needed.

If you require any further advice on this please contact our VAT Director, Iain Masterton, on iain.masterton@ct.me or 0131 558 5800.