Most small charities are not registered for VAT, so they cannot recover VAT on any rent they pay. Rent under a lease is sometimes exempt from VAT, but landlords may, either before or after the grant of a lease, waive this exemption and charge VAT on the rent. They may wish to do this in order to recover the VAT they pay on their own costs relating to the property.
However, under the VAT Act 1994, where a charity uses a property for a "relevant charitable purpose" it may "disapply" the landlord's election to charge VAT on the lease rent. A relevant charitable purpose is a use by a charity for non-business activities, for instance as a village hall or to provide social or recreational facilities for a local community. Using the rented property as an administrative office does not count, but if administrative use amounts to less than 10 per cent of the overall use (either by head count or floor space) the entire occupation may still be exempt from VAT.
The question of whether office space is used for administrative or business purposes, or for a relevant charitable purpose, can be complicated. HM Revenue & Customs will help charities to establish this where necessary.
To disapply a landlord's election to charge VAT, the charity must serve a certificate of relevant charitable use or "disapplication notice" on the landlord. There is at present no specified form of notice.
When entering into negotiations for a lease, a charity that cannot recover VAT should ask at the outset whether the landlord charges or intends to charge VAT on the rent. If the landlord will be charging VAT, the charity may then serve a disapplication notice on the landlord prior to entering into the lease in order to ensure that it takes effect from the start of the lease.
A word of warning, however: if the landlord has a particular need to charge VAT to cover his own VAT costs, he may not wish to proceed with the letting - or, alternatively, may require a higher rent.