HMRC changes VAT tack on tenant-landlord relationship

The review has been outlined in HMRC Business Brief 12/05, and reverses previous guidance offered in Business Brief 04/03, published in May 2003 in relation to a European Court of Justice ruling on the tax status of inducement payments made by landlords to tenants.

That ruling was interpreted by the High Court in a “narrow” way, HMRC states, which is why since May 2003, the guidance suggested any additional obligations attached to a rental contract, apart from paying rent, such as to redecorate every five years, would be sufficient to trigger VAT on the inducement payment as a “taxable supply”.

In HMRC language the position was that “a prospective tenant receiving an inducement payment would make a taxable supply by affording the landlord the advantage of being bound by the lease obligation the tenant has to fulfil”.

However, that position has now changed, with HMRC now accepting that lease obligations, to which tenants are normally bound, “do not constitute supplies for which inducements payments on entering leases are consideration.”

Instead, the department says the majority of such inducement payments are now “likely” to be outside the scope of VAT regulations.

”There will be a taxable supply only where a payment is linked to benefits a tenant provides outside normal lease terms. However, merely putting such a benefit as an obligation in a lease will not mean it ceases to be a taxable transaction.”

”It is considered that this change of policy now effectively puts inducement payments on a similar VAT footing to rent free periods, in being mainly outside the scope of VAT and only a taxable consideration when directly linked to a specific benefit supplied by a tenant to a landlord,” HMRC continues.

Examples of the ‘specific benefits’ mentioned, which may be taxable include:

Carrying out building works, such as necessary repairs or upgrades to property;

Carrying out refurbishment works, which are the responsibility of the landlord, but which the landlord is paying a tenant to undertake;

Acting as an anchor tenant.

HMRC admits the latest interpretation leaves somewhat of a fog hanging over the issue, but says it will look for “as much documentation as possible” before making any decisions.

It will, however, work to the assumption that there has been no supply agreement, and that “less specific indicators” will not trigger a VAT decision.

”For example, publicity indicating that company X is to take a lease in a development does not, in itself, determine that that company is an anchor tenant.”

Additionally, those who were forced to pay VAT under the previous guidance will now be able to make claims for the money to be returned – subject to usual HMRC rules, such as the three-year capping provisions.

HMRC admits “that there may have been certain cases where tax has been charged wrongly” under the previous guidelines.

If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].

IFAonline

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