Normally, you are only entitled to recover VAT that you incur on expenditure used for making taxable supplies to your customers. For these purposes, “taxable” includes zero rated income (e.g. basic food items, newspapers,etc.), but excludes VAT-exempt income (e.g. most property lets, some education, some healthcare).
Under Partial Exemption (see HMRC’s Notice 706), you are entitled to also reclaim VAT incurred in relation to exempt income only if the total amount does not exceed certain limits. These are currently (and have been for many years, so no real chance of any increases!) the lower of
- half of the expenditure VAT incurred for the period.
- an average of £625 per month.
You can reach that limit very quickly!
However it’s not just the letting agent’s fees where VAT recovery should be blocked or count towards these limits. It’s any expenditure that your business incurs in connection with its VAT-exempt activities. Also any expenditure covering a range of activities has to be apportioned. For example, if your main business was a shop and you’re letting the flat above it, any general costs relating to the entire building would have to be apportioned between the shop and the flat.