Visit many forecourts today and you’re likely to come across a familiar sight: parts of the premises sub-let to smaller ’independent’ businesses renting some space from the owner to carry out their own activities. The most common, of course, is the hand car wash. In other cases it may be a used-car sales operation or workshop activity. And, in some cases, the actual shop itself is completely separate from the fuel part of the operation.
In principle these arrangements can be viewed as a sensible way of maximising the return from a given space without requiring any more capital investment by the owner. There’s some part of the site which isn’t providing much (or any) return, so when someone comes along and offers to rent it from you the question looks like a no-brainer. In practice though, there are a few things to consider before accepting any offer.
The first is one that has featured several times in the news pages of this magazine over the past couple of months particularly in relation to hand car washes and that’s the issue of ’exploitation’ or more dramatically ’modern slavery’. You should bear in mind that multiple government agencies (including the police and HMRC) are actively investigating these activities, and there’s a good chance that if any of them decide to pay a visit to your premises, the only name they may have in their records is yours, and anyway by then whoever was paying you the rent is likely to have vanished.
Then we come to a more general question. How much do you know about the actual ’business’ activities being undertaken on your premises? The car sales or forecourt shop operations could be involved in money laundering; the workshop operation could involve stolen vehicles or fake parts. Of course, you’re not involved with anything like that you just collect their rent every month. A quick tip: if they’re paying that rent in cash, you could unwittingly but quickly find yourself dragged into a money laundering or proceeds-of-crime investigation. At that point you may wish you’d done some real due diligence on your tenants starting with just why they can’t or won’t pay you from a normal business bank account.
Areas of concern
Even leaving aside any deliberate criminality, there are still areas of concern, but at least you should be able to obtain some reassurance here: consider the matter of insurance. Anyone operating their own business out of your premises should be able to provide you with a copy of their current Public Liability and Employer’s Liability insurance certificates. If they can’t, then you must assume that they’re not insured; so you either shut down their activity immediately, or check that your own insurance policy covers them. However, even if your policy could cover them, do you really want to be in that position? Apart from any direct cost, it would bring you closer to being a part of their business which again could leave you as the only person left to answer any official questions if things go awry. Then there’s the whole issue of employment. Are they keeping proper wage records, or using a recognised external payroll provider? If so, you should at least ask to see up-to-date payroll records. If there aren’t any then worry: there’s at least a possibility that in the event of any HMRC queries, you might be deemed to be the employer with all of the liabilities that involves.
a Basic accounting issue
Finally, a basic accounting issue. Typically the property owner doesn’t charge VAT on the rent to their tenants usually because the tenant businesses aren’t themselves VAT-registered, so can’t reclaim it. That’s okay in itself but it can have unintended consequences for the landlord’s own VAT arrangements. Technically, if part of the premises is being rented out without a VAT charge, then there’s a restriction on the amount of input VAT that can be reclaimed in respect of those premises. That may not matter when the rental is for some empty land, but becomes more relevant if we’re looking at the whole forecourt shop being rented out. The actual value of any restriction will vary depending on the circumstances, but the point is that HMRC will expect to find a partial exemption calculation performed at least once a year, and any resulting adjustment to the VAT due from the landlord has been entered into the return.
Letting out part of your site may be a valid business idea but you really do need to take care over who you rent to, take some steps to reassure yourself that their activities are legal and compliant, and have a written agreement checked over by your solicitor before you sign it.