Since October 2012 the supply of facilities for storage purposes is subject to VAT, whether or not the landlord has opted to tax.  New HMRC guidance replaces VAT Information Sheet 14/12 and reminds landlords it is up to them to get the VAT right.

VAT liability

It is the responsibility of the landlord to ensure that the correct VAT treatment is applied according to the actual use of the property, so it is incumbent on the ‘exempt’ landlord to take measures to ensure that it is aware if the lessee is using the property for storage or permitting a third party to use it for storage.  A covenant in the lease against storage use is one option.

If the landlord has not opted but is made aware that the tenant intends to use the property for storage purposes and is prepared to tolerate this, HMRC recommend that the landlord obtains written confirmation of the intended use to be kept with their VAT records.  In this case, it may be sensible to include an obligation on the tenant to immediately notify the landlord if they stop using the property for storage purposes or permit a third party to do so, as rents will again be exempt from that point.  It might be easier for a landlord to opt to tax and have done with these complications – there is no doubt what HMRC are hoping will happen in most cases!

Use by third parties

If a lessee sub-lets the property to a third party for storage purposes the superior lease is not subject to standard rated VAT but the sub-letting will be. This is of no concern to the landlord.  If, however, a third party is permitted to use the property for storage purposes and the tenant does not make a separate supply to him; then the tenant is treated as using the property for storage and thus the supply between the landlord and the lessee is treated as standard rated.  It is therefore sensible for landlords to prohibit such third party use – or storage use entirely - in appropriate cases.