Until last year, VAT could be applied to rent when property was let between 2 VAT-registered parties. Normally, rent is VAT-exempt unless 2 VAT-registered parties agree otherwise. No one concerned themselves with what kind of premises were being rented. The advantage was mainly for the landlord, who could consequently reclaim input VAT on goods and services used for this economic activity (for example, repairs and maintenance of rented premises, legal services to draw up a lease, or furnishings).

An amendment to the VAT Act, however, significantly restricts this principle going forward. From 1.1.2021, a VAT-registered person cannot add VAT to the letting of residential premises, such as family houses, flats (or parts of them), or any premises where at least 60 % of the floor area consists of living space.

So what does this mean for landlords?
  1. Landlords will simply no longer be able to reclaim input VAT on purchased goods and services connected with letting these premises.
  2. Not only will they be unable to reclaim VAT on the current purchases mentioned in point 1, but if they previously purchased or renovated the property and reclaimed VAT, they will have to repay that VAT gradually to the state within the 10-year adjustment period from acquisition or capital improvement. And with property, this is no small amount of money.
And what does it mean for tenants?

Not a great deal. It makes no difference to tenants whether they buy services with or without VAT. Ultimately, the rent costs them the same amount. Unless the landlord raises it to collect the money needed to repay the VAT. 🙂

This change is very specific and does not affect most of my clients. However, it is useful to know generally that rents are VAT-exempt. Only two VAT-registered parties can choose to apply VAT to rent between them, and only for non-residential premises – which makes sense.

If you are unsure, feel free to get in touch and we will look at it together. 🙂