Alexandra Holsgrove Jones and Mark Braude discuss what you need to think about if you give your tenant a break in exchange for payment.

What are the VAT issues on rent reductions and lease variations? (new HMRC guidance).

Date published

09 December 2020

Varying leases: VAT considerations

Transcription

Alexandra Holsgrove Jones:

Welcome to another of our TLT Taster Sessions, brief discussions about current issues affecting the real estate sector. I'm Alexandra Holsgrove Jones, senior professional support lawyer in TLT's real estate group. And I'm joined today by Mark Braude legal director in TLT's corporate tax team. In a previous session, we talked about varying leases and how to avoid some of the pitfalls in doing that. And today we're going to explore some of the tax issues that can arise when you are varying a lease.

Alexandra Holsgrove Jones:

So Mark, we're currently seeing parties wanting to vary lease terms, and one variation could be in relation to the amount of rent payable. What are the VAT implications where the landlord agrees to reduce the rent?

Mark Braude:

Yeah. Well, thanks, Alex. This is very topical at the moment, obviously with lots of tenants looking to renegotiate terms for various reasons. And as a result, there's been some very recent HMRC guidance on this point. I think one of the concerns originally when a lot of this was being looked at was whether we might have a barter for that purpose, which is when you have both parties making a supply to the other. So in this case, it would be the landlord agreeing to reduce the rent and the tenant potentially doing something in return, such as agreeing to move a break clause or extend the lease terms or something to that effect. And the concern was then you have two potential suppliers for that purposes, which can create a lot of administrative hassle in terms of admission invoices. But also, if the two suppliers have a different VAT treatment, you can have more than one party needing to provide cash to the other when that's not necessarily parts of the overall agreement. So it can add in lots of complications.

Mark Braude:

So as a result of this, HMRC issued some very recent guidance just in September on this point, just clarifying how they see these sorts of situations. And generally, where a landlord agrees to reduce the rent and the tenant isn't doing anything in return, that won't be treated as supplier for VAT purposes, and there'll be no obligation to do anything on either of the parties with regard to VAT. And similarly, in a situation where the tenant is merely agreeing to do something in terms of altering the terms of the lease, such as moving a break clause, such as extending the term in the lease, again, HMRC are saying that in that case, they are not going to treat that as barter, and each supplier under the lease would take its normal VAT supply.

Mark Braude:

So in those scenarios, things look relatively simple. You're likely to get a slightly more difficult territory if the tenant is agreeing to do something in return for production in rent. So an example might be to do some works, perhaps, or to make specific payments. In that case, you may well then have a supply being made by each of the parties. But the recent HMRC guidance is helpful and should simplify the VAT analysis in most cases.

Alexandra Holsgrove Jones:

So I think you mentioned it briefly there, but just to clarify, where the lease is varied to include a tenant break, that VAT position isn't any different from the one that you have just described. Is that correct?

Mark Braude:

Yeah, that's right. So if we're talking instead of a rent reduction of the lease, if the landlord agrees to include a new break clause or to do something with regards to the break clause, then I think the position is likely to be very similar. Is the tenant doing anything in consideration for that, or is that sort of freely given? And if is freely given or if it's only in consideration for an alteration to the terms of the lease, then there isn't likely to be any VAT consequence.

Alexandra Holsgrove Jones:

Okay. That's helpful. What about the position in relation to SDLT in those scenarios?

Mark Braude:

Yeah. So in that case, and again, HMRC have included this as part of that guidance. And again, the position would really come down to, well, what is actually the tenant giving in return for this reduction in rent or the insertion of the break clause? And to the extent it is freely given and there's nothing being given by the tenant in consideration, then there shouldn't be an SDLT impact. However, if that's not the case, if the tenant is paying for this or providing some sort of deemed consideration, such as agreeing to do work, so something to that effect, then there is likely to be a charge event for SDLT purposes, and one would need to quantify the amount of consideration and therefore the amount of SDLT charged in those circumstances. But I think in that case, an SDLT, you'd need to determine is the tenants actually giving any consideration or deemed consideration, and then they would have to look at the analysis from there.

Alexandra Holsgrove Jones:

That's helpful. Now at TLT, we don't just deal with properties in England. So is there any difference to what you have said if we're looking at properties in Wales, Scotland, or Northern Ireland?

Mark Braude:

No. I think in most cases that wouldn't be the case. So certainly with regards to the VAT analysis, it's likely to apply equally in all of the different jurisdictions. And as you know, with regards to SDLT, we have slightly different regimes in Wales and Scotland. In Wales, we have a Land and Buildings Transaction Tax. And in Wales, we have the Land Transaction Tax there as well. So they have slightly different regimes there, but the regimes are quite similar to STLT. So, although you probably want to look at it on a case by case basis, and there may be some slight quirks, I think in most cases I would expect the analysis to be quite similar.

Alexandra Holsgrove Jones:

Thanks, Mark. That's a really useful overview of some of the tax issues to consider when varying a lease.

Alexandra Holsgrove Jones:

If you have any questions on the points that we've discussed, then please get in touch. And you can also sign up for other TLT Taster Sessions.

 

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