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HMRC internal manual

Business Income Manual

Measuring the profits (particular trades): Public house tenants: rents payable

Many of the breweries have opted to tax their properties under Sch 10 Value Added Tax Act 1994 and therefore they must charge VAT on the rent charged to tenants of their tied houses. By putting an option to tax in place, they are able to obtain relief for the input VAT they bear on expenditure on the premises, for example, repairs. As the tenant is also VAT-registered, he can obtain relief for the VAT he pays in respect of the rent.

For more on the option to tax, see the VAT Land and Property Manual.

There is a widespread impression amongst tenants that the breweries reached an agreement with Customs and Excise (prior to the formation of HMRC) that 90% of the rent be deemed commercial with the remaining 10% representing the charge for domestic accommodation. Although an agreement was made, it was not in those terms. That agreement only applied for the purposes of VAT.

For the purposes of computing trade profits, the ‘wholly and exclusively’ rule applies, which means that no deduction is available for proportion of the rent paid in relation to the dwelling house (i.e. the flat above the pub) as there is a duality of purpose (see BIM37900 and BIM37930).

In terms of the deduction for the rent in relation to the pub, each case should be considered by reference to its own facts. Since most public house rents are calculated by reference to turnover, a percentage disallowance by reference to area is rarely appropriate. The 10% figure mentioned above should not be used as the measure of the domestic accommodation for the purposes of computing trading profits (except in those cases where 10% happens to be a reasonable figure based on the particular facts and circumstances).

Do not make any general attempt to reconsider private adjustments for such rental payments.