VAT on a sub-letting

We recently had a VAT inspection on a client and the following situation arose. The client pays VAT on the rent for its light industrial premises. For several years half the premises were sub-let and VAT was charged by our client to the sub-tenant.

At the VAT inspection the HMRC officer advised us that because the client had not elected to tax the rented property he was not entitled to charge VAT on the rent to the sub-tenant. In HMRC’s view this is an exempt output. Is this correct?

At previous VAT inspections we have been advised that where insurance costs are incurred which are an exempt input and which are charged on to tenants or sub-tenants VAT should be charged to the tenant or sub-tenant as long as the landlord is registered for VAT. This appears to be contradicted by the VAT officer’s...