Only if the tenant decided to carry out a business activity would the owner be obliged to charge him/her VAT and, therefore, submit the corresponding quarterly VAT returns to Inland Revenue. That is to say, 21% VAT (current rate) would have to be added to the agreed rent, even if only one room of the property is going to be allocated to carrying out a business activity and the rest of the house is being used as the tenant´s habitual residence.
In other cases, rents are exempt from VAT. However, it is very important to bear this in mind when drawing up a rental agreement, since the lessor has to specify in the contract whether the carrying out of any business activity by the tenant is allowed and, if it is authorised, we advise that the owner should be notified of such intention in writing within a specific time-frame once the activity has started
This is because if the Tax Agency were to check this out and find out that a business activity is being carried out, VAT would be claimed from the property owner and not the tenant. Claims can be made for the four previous years, including accrued interest and possible sanctions.
In light of this possible scenario, the lessor could always allege a breach of contract by the lessee if the aforementioned notification clause had been included in the contract.
To sum up, it is very important that this question is made clear in the contract as well as indicating the consequences in the case of a tenant failing to notify the start-up of a business activity on the rented property.