HMRC has published guidance: Revenue and Customs Brief 11 (2020) on how some arrangements between landlords and tenants affect VAT (and Stamp Duty Land Tax). HMRC recognises that such changes have become more frequent as a result of the COVID-19 pandemic.
As a result of the current pandemic, many tenants are suffering a loss of income and want to vary the terms of their lease with their landlord. The brief provides guidance on the appropriate VAT treatment of the most common lease variations, specifically those:
- which vary the amount of rent a tenant pays
- where a lease extension is being agreed
As always with VAT, the correct treatment will depend on the actual agreements which the landlord and tenant enter into.
Examples
Examples of lease variations are:
- period of reduced rent
- rent-free period
- rent holiday
In the guidance HMRC give examples of four examples of lease variations, but the main issue in all of them is what the tenant does in return for the variation; if anything.
VAT Treatment
Generally speaking, if a tenant makes no payment there is no supply, and so no change in the tax liability of the supply made by the landlord to the tenant. However, in cases where the tenant does something in return for a reduction in rent (which equates to consideration, albeit non-monetary) this is usually a supply by the tenant to the landlord. An example of this is; if the tenant agrees to carry out work to the building for the landlord’s benefit.
In such cases the rent reduction is equal to the value of that supply and the landlord must account for the VAT as though the rent was still being paid (if they have opted to tax the property).
Value of landlord’s supply
If the tenant does nothing in return for a reduction in the rent payable, output tax is only due on the reduced or deferred amount of rent received by the landlord- assuming an option to tax is in place.
Invoices
If both supplies are taxable at the standard rate, the amounts of VAT due on each supply are likely to be similar and the landlord and tenant will need to issue VAT invoices to each other. The input tax claimable is dependent on the overall partial exemption status of the parties. It is not possible to “net-off” the value of the supplies.
Commentary
There have been no changes to legislation or HMRC’s approach in these cases, but the guidance id a helpful reminder that VAT (and SDLT) must be considered in any lease variations.