Re-invoicing utilities to tenants: VAT, withholdings and passed-on expenses

When a landlord re-invoices utility costs or taxes to a tenant, questions often arise about VAT and withholdings: should VAT be applied to water or electricity? Are they part of the rental base? Does it depend on whether it is a residential property or commercial premises?

When recharging utility costs to a tenant, it is essential to apply the same VAT treatment as that given to rent payments. This practice is mandatory for both residential and commercial property owners.

In this article, we explain how recharging expenses to tenants works, what VAT treatment applies in each case and how these amounts should be included in the invoice and, where applicable, in the income tax withholding.

What is recharging expenses to tenants?

Re-invoicing consists of passing on to the tenant the expenses that you incur as the owner. This includes taxes and utilities that are in your name, such as water, electricity, property tax or municipal taxes. The tax treatment will depend on the type of rental:

• Housing: Rent payments are exempt from VAT, therefore the expenses passed on do not generate VAT either.
• Commercial premises: Rent is subject to VAT (21%), so the expenses passed on are also subject to VAT.

Practical example of recharging utilities with VAT

Let suppose that this month you have rented a commercial space and the tenant is responsible for the property tax and rubbish collection fees. In addition, until the utilities (water and electricity) are transferred to the tenant's name, you will pass on the costs to them. The details are as follows:

• Rental income: €1,200
• Annual insurance for the premises (excluding VAT): €400
• Utilities: €300 + VAT (21%)

Calculation of the invoice

Total base: €1,200 + €400 + €300 = €1,900

Applicable VAT (21%): €399

Total invoice: €2,299

Tenant's withholding

If the tenant is obliged to withhold income tax, they must withhold:

• 19% on €1,900 (rent + passed-on expenses) = €361

It is important that the tenant includes both the rent and the passed-on expenses in the withholding base.

Tax tips for re-invoicing landlords in Catalonia and Spain

• Always keep utility and tax invoices so that you can justify the charges.
• Check whether the rent is exempt or subject to VAT before charging expenses.
• If you have any questions about withholding or VAT, consult a tax advisor or the Tax Agency.

The correct application of VAT avoids penalties and facilitates the tax deduction of expenses incurred.