Is there VAT on Rent Deposits?

Updated 18 August 2021

If you have received a demand for a rent deposit as a tenant or are raising an invoice for a rent deposit as a landlord, then you may be wondering if there is a VAT on rent deposit. Here’s what needs to happen.

Residential landlords and residential rents are exempt from VAT and so are unaffected by VAT on rent deposits.

Is there VAT on Rent Deposit?

There is no VAT on rent deposits because it is a tax on goods and services. So when it comes to a rent deposit, no service has been provided meaning it is not VAT-able.

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, tt comes down to negotiation between the Landlord and Tenant, but the terms of the deposit will be normally specified within a contract or lease agreement.

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

Rent Deposits are paid either to the Landlord or their agent, in accordance with the lease agreed. A VAT invoice is not necessary since it does not represent rental income.  But the tenant should expect to 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 tax point and VAT due (normally charged at the standard VAT rate of 20%). The tenant will be able to claim back any VAT they have paid provided they are VAT registered.

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.

The bookkeeping entry for the tenant would be Dr Rent Deposit (current asset) and Cr Bank Account. The bookkeeping entry for the Landlord would be Dr Bank Account and Cr Deposit Control (current liability).

If the Landlord needed to draw on a rent deposit then the landlord would need to raise an invoice for the amount they are claiming for, with VAT and enter it as a normal sales invoice. The tenant would need to reduce the rent deposit on their balance sheet by the amount on the invoice they’ve received for the claim (again, they would be able to claim back any VAT they have been charged).

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About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.