VQOTW: Subletting Opted Premises

Q) My client, a VAT registered company, has been renting two adjacent units for use in its own joinery business. The landlord has opted both properties and charges my client VAT on the rent. The company uses one unit as a workshop; the ground floor of the other unit is his hardware shop. Above the shop is an unused office with six desks and a storeroom. The director has recently agreed to sub-let the unused space to two different businesses. A recruitment company will be renting the office space for its administration team and an engineering firm will be using the other space to store excess parts. I presume my client will charge VAT on both supplies as the landlord has opted to tax the unit; is that correct?

  1. Your client is making supplies of land. Usually, the grant, assignment or surrender of an interest in land; a right over land, or a license to occupy land is an exempt supply, unless there is an option to tax in place.

The rental of the office would be a license to occupy land if it meets the following criteria:

  • The new tenant has an occupation of a defined area of land,
  • For an agreed duration,
  • In return of a payment, and
  • Has the right to occupy that area as an owner and to exclude others from using it.

As it stands at the moment, your client would be making an exempt supply of the office space, as they do not have their own option to tax in place. An option to tax exercised by the landlord does not bind anyone other than the landlord. The joinery company will need to opt its own interest in the land, by submitting a VAT1614A, in order to charge standard rate VAT and avoid any partial exemption issues.

The provision of storage space is one of the exceptions when it comes to supplies of land.  Since 1 October 2012, there has been no distinction between the VAT treatment of storage services and self-storage; both are taxed at the standard rate regardless of whether an option to tax has been made. This exception is not one of those listed in VAT Notice 742 section 3.1 but you can find more information in the VAT manual covering land and property: https://www.gov.uk/hmrc-internal-manuals/vat-land-and-property/vatlp17600.


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VAT Advisor
0844 892 2470


Priyesh has worked as a VAT Compliance Officer for HMRC since 2013 prior to joining Croner Taxwise. He initially worked in Small and Medium Enterprises before moving on to Wealthy & Midsize Businesses in 2014 where he gained a broad understanding of VAT and trained new VAT entrants.

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