Hua Hin Rental contracts

Rental contracts

When does VAT apply ?

It is a common practice in Thailand for landlords to propose sevaral contracts when they engage a new tenant. Apart from the rental contract for the space, contracts may be proposed for the rental of any furnishings and for services relating to the use of the property e.g. the common area services in the case of a building. The reason behind the split is taxation, often driven primarily by the 12.5% house and land tax that applies to the rental of buildings forcommercial purposes. VAT  and leases VAT may also be a prime reason to split the contracts, as the rental of space is one of the businesses under the Revenue Code that is specifically exempted from VAT. Landlords therefore do not have to add 7% VAT to space rentals. The rental of furniture and the provision of property related services on the other hand fall outside the exemption.

From a VAT perspective, a landlord may invariably end up carrying on two businesses, one that is exempted and annother that is not. This normally makes record keeping and compliance with the laws more complicated, especially on the expenses side.

A VAT registrant is entitled to claim a credit for the VAT paid (referred to as “input VAT”) on most types of expenditure relatint to the VAT business. VAT paid on certain expenditure cannot be claimed, including the expenditure that relates to the use of the office space, because it is a VAT exempt business.

To be entitled toclaim input VAT as a deduction, the redistrant must posses a tax invoice prepared in accordance with the format prescribed by the Revenue Code. The lanlord will therefore have to keep track of his expenses, make sure he receives proper tax invoices so he can have a chance of claiming a credit for the VAT and non-VAT businesses. Concessions for small landlords It is advisable to stay out of the VAT system if you can do so legally - once you apply to become a VAT registrant  it is not a simple matter to de-register, so it is not a decision to be taken lightly. Lndlords operating a few properties only may be able to avail themselves of  the sall business exemption. Where the annual turnover from services chargeable to VAT does not exceed THB 1.8 mollion, a lanlord does not have to register for VAT. This means a lanlord could legally stay out of the VAT system and not add 7 % VAT to any of the amounts charged to the tenant, including any furniture rental and service fees. However, it is still prudent to consider splitting the contracts for housw and land tax purposes.

VAT planning

Where a landlord has a number of tenants, for wxample a landlord operation a multi storey office of residential block, the VAT registration is probably invitable.

A recent Supreme Court case offers a reminder as to why landlords need to consider their liabilotu tp VAT carefully when intifying and separating out the services offered to tenants. The case involved the lease of space in an office block. The landlord was also responsible for the provision of services, such as water, air conditioning, security, lifts and maintenance. In some cases, the landlord had entered into a single rental contract with the tenant. The landlord did not charge VAT on the basis that the rental of the office space was VAT exempt. In other cases, the landlord had entered into two contracts with the tenant: on for the rental of space and another for the provision of the afprementioned services. The landlord did add 7% VAT in this case to the service fee component. The landlord was audited vy the Revenue Department, which led to a tax asseddment being raised for VAT in the cased where the landlord had entered into a single rental contract and did not collect any VAT form the tenant. The landlord argued that the form of the single contract did not allow him to charge VAT to tenants.

The court did not accept this argument but instead adopted a substance over form approach, because the same services were being provided to all tenants regardless of hot the contracts were written. The lanlord was not able to avoid his liability to charge VAT simply by writing a single rental contract. This court case highlights the importance to landlords of indentifying the rental services that are subject to VAT and charging their tenants accordingly, regardless of the form of the contractual arrangements made with the tenant.