Premises are usually a business’s second-largest overhead after staff. The bills arrive from different people, on different cycles and with different VAT, which is exactly why one “Rent and rates” account causes trouble. Splitting the costs makes the VAT return, the prepayment schedule and the lease review much easier.
Accounts for premises costs
- Rent – the rent under the lease or tenancy agreement
- Business rates – charged by the local council
- Service charges – the landlord’s recharge for common areas, maintenance and building insurance
- Premises repairs and maintenance
- Light, heat and power and water, if you want them separate from general utilities
- Cleaning and waste
Two balance sheet accounts complete the set: prepayments, for rent paid ahead of the period it covers, and rent deposits, for money the landlord holds as security.
VAT on each kind of premises cost
| Cost | VAT position | What to check |
|---|---|---|
| Rent, landlord has not opted to tax | Exempt, no VAT charged | Nothing to reclaim |
| Rent, landlord has opted to tax | Standard rated at 20% | Reclaimable if your business makes taxable supplies |
| Service charge | Usually follows the VAT treatment of the rent | Look for VAT on the landlord’s demand |
| Business rates | Outside the scope of VAT | Never use a VAT code |
| Utilities | Standard or reduced rate depending on supply and usage | Read each bill |
A landlord’s option to tax is the choice to charge VAT on rent for a commercial building that would otherwise be exempt. You cannot tell from the lease alone; the landlord’s invoice or rent demand will show VAT if the option has been made. Keep a copy of the landlord’s notification on file, because HMRC can ask for the basis of any input VAT you claim on rent.
Business rates are a tax, so there is nothing to reclaim. Small businesses may be entitled to relief; see business rates for how rates are set and reduced.
Quarterly rent in advance
Commercial rent is commonly paid quarterly in advance, so at most month ends part of the last payment relates to future months.
A café pays £9,000 plus £1,800 VAT on 1 March for the three months March to May. The VAT is reclaimable on the return that covers the invoice date. At the 31 March month end, one month has been used:
| Account | Debit | Credit |
|---|---|---|
| Rent | £9,000 | |
| VAT control account | £1,800 | |
| Trade creditors | £10,800 | |
| Prepayments | £6,000 | |
| Rent | £6,000 |
£3,000 is then released from prepayments to rent at the end of April and again at the end of May. An alternative that some bookkeepers prefer is to post the whole invoice to prepayments and release £3,000 each month. Either way, rent in the profit and loss account is £3,000 a month. The general method for spreading costs is under accruals and prepayments.
Rent deposits are an asset
A deposit paid on signing a lease is money you expect to get back, not a cost. Post it to a rent deposit account under debtors; if it will not come back within twelve months, the accounts show it as a debtor falling due after more than one year. Where a deposit is held in a separate deed account and earns interest, the interest is your income. Any amount the landlord keeps at the end for dilapidations becomes an expense then, unless you have already provided for it. See security deposits for how to track several deposits.
Lease accounting changes under FRS 102
For accounting periods beginning on or after 1 January 2026, the amended FRS 102 requires lessees to bring most leases onto the balance sheet. Instead of a rent expense, the business recognises a leasing accounts in the chart of accounts and a lease liability, then charges depreciation on the asset and interest on the liability. Short-term leases and leases of low-value assets can still be expensed. The Financial Reporting Council publishes the current edition of FRS 102.
Micro-entities applying FRS 105 were not affected: they continue to expense lease payments as rent. If your company moves between FRS 105 and FRS 102, the rent account’s role changes with it, so agree the treatment with your accountant before the first affected year end.
Reviewing the premises accounts
- Rent should be a steady monthly figure; a month with nil or triple rent means a prepayment release was missed.
- Business rates should agree to the council’s annual bill and instalment plan.
- Compare service charge demands to the landlord’s year-end reconciliation, which often produces a balancing charge or credit.
- Check that no business rates have been given a VAT code and that VAT on rent is only claimed where the demand shows it.
- Diarise rent reviews and lease breaks, since both change what the ledger should be showing.