Can you charge VAT on residential property?
Let’s get straight into it. There is no VAT on residential property. This is an exempt supply in terms of the VAT Act. However, one needs to be careful and correctly distinguish between residential and commercial letting.
The distinction between residential and commercial property is important because while residential accommodation is exempt, commercial accommodation attracts VAT at the standard rates. Also, certain rules apply where commercial accommodation is supplied for less or 28 days and where is supplied for more than 28 days. We will look at this later. First, let us define and distinguish between residential and commercial accommodation.
Simply put, this is where you own a residential house that you let out, predominately used as a place of residence or abode of a natural person but excludes the supply of “commercial accommodation.” Where this is the case, there is no VAT applicable to your rental income. Also, you cannot claim input tax.
This is the supply of such accommodation such as hotel, B&B, guest house, retirement home, frail care homes etc. It is clear that excludes a dwelling as defined under residential accommodation.
This kind of accommodation attracts VAT at the standard rates.
The 28-days rule:
It gets a bit interesting when the commercial stay is a bit longer.
Under commercial accommodation, if the stay is 28 days or less, then the full amount chargeable to the client is vatable at the full standard rate. In other words, the VAT charge is the standard rate multiplied by the full charge before VAT. For example, assuming that the full charge before VAT is R100 and the standard rate is 15% then the VAT charge would be equal to R100 x 15% and the full price plus VAT would be equal to R115.
If the stay is of an unbroken period of longer than 28days, then only 60% of the amount charged is deemed to be vatable. Using the example above, this would be R60 of the full price charges. This effectively means that the VAT rate drops to 9% (15% x 0.6)
You may need to get you accounting system to have this additional VAT rate for stays longer than 28 days (but of course, you need to remember that this is for an unbroken period of stay.)
Secondly, your VAT201 return will need to disclose the 60% and 40% separately because they are using a different tax rate. One needs to be careful with the 40% because it is not an exempt supply, which means it may not have a place on the VAT return.
This will now mean that reconciliations should be done and kept because an IT14SD reconciliation may be issued because the 40% may not necessarily be disclosed on the VAT return.
We must also point out that you will be able to still claim 100% on the input side because the 40% is not treated as an exempt supply.