HMRC Policy on Lease Changes : Watch the Vat

by Melanie Lord of AVS Vat

HMRC Lease Changes

It is extremely likely that nothing will be returning to normal anytime soon and that must surely be more true of commercial property than of almost anything else. Both landlords and tenants are busy renegotiating lease terms going forwards, in response to which HMRC policy on lease changes has just been reconfirmed in a Policy Paper (click here). This explains how certain arrangements can affect either or both VAT and Stamp Duty Land Tax.

As with anything VAT-related, the precise answer follows the precise facts after taking into account not only any documents or agreements but also the nature of what is actually being done. Typically lease changes might take the form of reducing the rent due; a rent-free period or even a rent holiday. If there is nothing ‘given‘ in exchange for such variations then the VAT position is unchanged. However, you need to sit up tall and pay attention if the tenant agrees to do something in exchange for the landlord agreeing to vary the lease terms.

If the tenant agrees to do something more than be the tenant, it is likely that:

  • The tenant will be treated as making a supply so that the value of any rent reduction/ holiday etc. will count as the value of a supply on which VAT could fall due (depending on what is being done) and
  • The landlord may have to account for VAT as though rent was still being paid

The problem comes where these deemed charges are being offset as the landlord and tenant ought to exchange VAT invoices with each other, even if the values are equal and opposite.

HMRC VAT changes

HMRC provide four examples of how VAT applies to different lease change situations

  • If the landlord has opted to tax and reduce the rent payable without making any other changes to the lease, VAT will be due on the revised rent due. As the tenant is not agreeing to do anything more than continue to pay rent under the revised lease, it is not making a supply. This equally applies where the landlord:
    • defers the rent by changing the time it is paid, or by paying on deferred terms
    • changes the way the rent is calculated, for example basing the rent on the tenant’s turnover or adjusting the rent review arrangement
  • If the Tenant agrees to an extended lease or variation then the tenant is not making a supply to the landlord by agreeing to pay rent under the varied lease. Where the landlord has opted to tax, they will account for VAT on the rent that is due in line with the revised timing and values.
  • If the Landlord changes the terms and, in exchange, the tenant agrees to more than paying rent then both the landlord and tenant are making a supply for VAT purposes. For example, the tenant agrees to do some work to the building for the landlord’s benefit. The tenant’s supply would be a VATable supply of construction services, and the landlord’s supply would be a supply of land which would be VATable if he had opted to tax.
  • If the tenant agrees to a new lease with new terms, they are not making a supply to the landlord just by agreeing. If the Landlord has opted to tax then the supply of the new lease will be VATable provided the option is not excluded or disapplied –

Where VAT has not been accounted for correctly adjustments might be needed using the error correction process but please tread carefully, these are complicated rules.

Please give us a call if you’re in any doubt about HMRC policy on lease changes, always better to get it right from the start and it really is always better to do it sooner. View our membership benefits.

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