VAT on Disbursement/recharge on reduced rate items

DebsNJ Registered Posts: 14 New contributor 🐸
I have received a bill which is a direct recharge of electricity and I'm not sure if the VAT has been charged correctly.

This electricity account is for the common areas of a building. A tenant used to occupy the entire building and so paid this account, however now that they only occupy one unit the electricity account is the responsiblity of the landlord. The landlord and tenant have agreed that the tenant will continue to pay the account (they have a fixed rate contract which is significantly cheaper than the landlord could get if they opened a new account) and will be reimbursed by the landlord.

I have received the first bill from the tenant and they have charged the electricity costs net and then added 5% VAT. Exactly how the bill from the supplier is to them. Is this correct?

The tenant is VAT registered but the landlord is not.

I believe that recharges have to be charged at the standard rate.

I think that this could class as a disbursement which are out of the scope of VAT, so would that mean they charge us the net electricity costs and not the VAT?


  • AndrewLeyland
    AndrewLeyland Registered, MAAT, AATQB Posts: 35 Regular contributor ⭐ 😼 ⭐
    Often a question i get from franchisees from where i work is why do i need to charge VAT when the payment i received has come without the VAT (i work in insurance and VAT is not paid when the settlement is all cash to a Policy holder). Because they are VAT registered are they raising a invoice to the land lord and treating it as income?

    If so they should be charging VAT at the rate they are be at the rate they where charged VAT in this case since they not made any changes to it or adding marked up the price plus the point of VAT is that the burden of what has to be paid is on the end user. The only VAT they should be able to claim back will be for what they have used. So the rest of the costs should be the landlord. In my opinion though the landlord should setup a account in there own name for the other units since the costs are theirs and not the tenants.
    RegardsCiaran Andrew Leyland
  • davealucas
    davealucas MAAT Posts: 139 Dedicated contributor 🌟 🐡 🌟
    I am not sure why the tenant would have agreed to pay for the electricity bill directly for the common areas, surely this would be the responsibility of the landlord (albeit they can still recharge the tenant for a proportion of the costs relating to the premises they occupy).

    You are correct about the VAT though. Commercial electricity should be charged at the standard rate of 20%. The reduced 5% rate is for domestic properties only.
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