Government announces plans to charge VAT on self storage

The coalition government has announced plans to make self storage liable for value-added tax (VAT) as part of the 2012 budget, in a move that has potentially significant consequences for the UK self storage industry.

Why hasn’t VAT been charged on self storage in the past?                    

VAT, which is currently charged at the standard rate of 20%, hasn’t previously been levied on self storage rentals because self storage was treated in the same way as commercial property lending by the tax authorities. Under the previous tax arrangements, the lending of any kind of land, including rental property, was exempt from VAT.

However, not all kinds of storage have previously been treated in the same way. In particular, the kind of warehouse storage provided by removal companies is currently subject to VAT. The reasoning behind this distinction was that self storage companies are being paid in return for letting a discrete area of land to their tenants (in the form of private, individual self storage units), which means they are in effect operating in the same way as property letting companies.

By contrast, warehouse storage firms do not charge their customers in return for a discrete area of space (as their warehouses usually aren’t divided into individual units), but are instead being paid for providing the service of storing peoples’ goods. This was the crucial difference which meant one was VAT-liable and the other was not.

The government has recently been researching what it calls “borderline anomalies” in the tax system; cases like this where two parts of the same industry are treated in different ways under the tax system. Their conclusion was that self storage and removal company warehouse storage should be treated in the same way, in order to “level the playing field between different types of storage”. Their report is available here:

http://www.hmrc.gov.uk/budget2012/vat-con-4801.pdf

HMRC estimates that charging VAT on self storage will generate an additional £15 million for the treasury during the 2012-13 tax year, which they forecast will have risen to £30 million by 2013-14.

When will this plan come into effect?

Under the proposals outlined in the document which is linked to above, self storage customers would have to start charging their customers VAT from October 1 this year.

What impacts will charging VAT on self storage have?

The impacts of charging VAT on self storage will vary for different self storage firms. The basic upshot of it is that virtually all self storage companies will have to pay 20% of their self storage rental income to the government in tax.

However, it is not quite that simple. Obviously, the net result of this is likely to be that self storage becomes more expensive for customers, as firms pass on the cost of this extra tax, but it will be up to each individual firm to decide how much they pass on and how much they attempt to absorb from their existing turnover. All self storage firms will be aware that increasing their prices too much is likely to deter potential customers, which is the last thing they want to do.

It also needs to be pointed out that this change will not affect all customers equally. Most businesses which use self storage (businesses are thought to account for roughly 1/3 of all self storage customers) will be able to reclaim any VAT they are charged, so for them the cost increase will be neutral. Similarly, HMRC anticipates that most self storage providers will start reclaiming VAT themselves once they are charging it on their core businesses, offsetting some of the extra expense.

Where this plan will definitely cause self storage providers extra difficulties is in the administration department. VAT-registered businesses have to send HMRC a quarterly VAT return, creating extra paperwork for the industry. They will also have to communicate that this change has taken place to all their existing customers, which will involve working out how much notice they are legally required to give before altering monthly rental fees.

Where this change will create particular administrative hurdles is in dealing with companies who want to claim VAT-relief, as they are likely to need a statement added to their monthly invoices which makes it clear how much VAT they have been charged each month.

2 Responses to “Government announces plans to charge VAT on self storage”

1. Mat Stevenson says:

   April 5, 2012 at 9:49 am

   Having been in the commercial storage sector for many years we opted to charge VAT initially, so this news does not affect us at all. In fact we embrace it wholeheartedly! We were in the process of preparing to submit a request to HMRC to be opted out of charging for VAT on our new self storage services, but now we don’t have to. We are already on average 30% cheaper than our nearest “competitor” (i use the term loosely), so if they have to increase their charges by 20% to swallow this new government increase……bring it on.

2. Bob C says:

   May 10, 2012 at 2:10 pm

   Its about time this was made a level playing field. Anyone who thought that our industry could sit under the radar for ever was mistaken. This is a push from Brussels and something that we should have all kept a eye on and made provisions for. As per Mat ” Bring it on..”