Generally only commercial landlords have to consider the question of VAT on rent deposits. Residential landlords are outside the scope of VAT and so are unaffected.
Question: Is there VAT on Rent Deposit?
Answer: There is no VAT on Rent Deposits
Let’s look at why.
VAT can be one of the most confusing taxes a business owner or commercial landlord needs to deal with. But it helps to think about VAT as a tax on goods and services. In the case of a commercial landlord the service provided is rent.
When a rent deposit is demanded no service has actually been provided.
What is a Rent Deposit
A rent deposit is a sum of money demanded up front by a Landlord which is held on account while the tenant is renting from them.
There are no legal requirements as to the terms a Landlord can set around a Rent Deposit. It comes down to negotiation between the Landlord and Tenant.
The terms of the rent deposit will be normally specified within a contract or lease agreement.
Why Are Rent Deposits Required
Landlords are keen to collect rent deposits since it gives them peace of mind in the event of a problem.
Generally the problems a Landlord like to protect themselves from scenarios like:
- Unpaid rent
- Damages to property
How are Rent Deposits Paid
Rent Deposits are paid either to the Landlord or their agent, in accordance with the lease agreed.
A VAT invoice is not necessary since this does not represent rental income. Since no invoice is raised there is no VAT on rent deposits.
The tenant should expect to the receive invoices with VAT for rent payable.
When to add VAT on Rent Deposits
If for any reason a landlord needs to draw on the rent deposit additional VAT will become payable.
The landlord would need to raise an invoice showing the amount of the rent deposit used, the date or tax point and VAT due. This can come as a surprise to tenants who find themselves with an extra amount to pay (even if they can claim it back).
Bookkeeping Entry for a Rent Deposit
The bookkeeping entry for a rent deposit affects just the balance sheet for both the Landlord and the Tenant. Until the landlord has a reason to draw on the deposit, it is a fully refundable amount of money.
Bookkeeping Entry for the Tenant
Dr Rent Deposit (Current Asset)
Cr Bank Account
Bookkeeping Entry for the Landlord
Dr Bank Account
Cr Deposit Control (Current Liability)
Bookkeeping Entry for Using a Rent Deposit
If a Landlord needed to draw on a rent deposit then the bookkeeping entry would be as follows:
Step 1 – The Landlord would need to raise an invoice
Dr Trade debtors
Step 2 – Bookkeeping entry to show use of the rent deposit
Dr Rent Deposit
Cr Trade Debtors