Covid-19 and HMRC’s latest views on VAT and lease variations

HMRC have recently published new guidance (available here) on the VAT and SDLT implications of certain lease variations. In spite of HMRC’s statement that there is no change in policy, the VAT guidance represents a move away from what many advisers might previously have considered the position to be on certain lease amendments, where each party “gives something” to the other.

The new guidance has been driven by the Covid-19 pandemic, as many tenants are enduring financial difficulty, resulting in landlords being asked to vary the terms of leases to help tenants through the difficult period.

A basic and common example of this is where a tenant agrees either to remove or push back a break right in a lease, in return for the landlord granting a rent concession or rent-free period. Prior to the new guidance, it was considered by many advisers that this could amount to a “barter” for VAT purposes, i.e. mutual supplies taking place (the landlord supplying the rent concession, the tenant supplying the variation to the break right) for non-monetary consideration. If the “barter” analysis is correct it means that each party would have to charge VAT on its own supply, if it had opted to tax the property concerned, with VAT being charged on a subjective assessment of the value of the consideration given for that supply.

The new guidance and a subsequent statement issued by HMRC to the British Property Federation makes it clear that HMRC’s view is that where the tenant agrees only to an extended lease or a variation to a break clause in the existing lease in return for a rent concession, the tenant does not make a supply to the landlord. There would accordingly be no barter, and no “new” supply for consideration in either direction – HMRC say that “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 tenant does something more than just agreeing to pay rent under the lease (or an extended lease), then it is clear that the barter analysis can still apply. A typical example (and one given in the HMRC guidance) is where the tenant agrees to carry out works on the property for the landlord in return for a rent-free / rent concession. In that case the tenant would be making a VATable supply of services on which VAT should be charged (whether or not it had opted to tax the property concerned), and the landlord would be making a supply in relation to the land and so would have to charge VAT if it had opted to tax.

For situations not specifically covered by the guidance, careful consideration will still be required as to whether each party is making a supply to the other - so that a barter transaction exists - and if so whether those supplies are VATable (which may depend on the option to tax) and the consideration for the supplies.

In the same guidance, HMRC also run through some typical SDLT points on such situations, although this is really no more than repeating well-established principles. For example, the idea that if the tenant does not give any chargeable consideration for a variation to a lease (e.g. for a rent reduction) there will be no SDLT liability and for SDLT purposes there is a specific rule that prevents typical tenant obligations from being chargeable consideration, but if a lease is varied to extend the term, in law this will take effect as a surrender and re-grant and so will trigger an SDLT liability (albeit with the possibility of overlap relief for rent that has already been taxed) and likely a requirement to file a new return within 14 days of the variation.

Posted on 26/10/2020 in Property Tax News, Stamp Duty


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