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VAT and Commercial Leases

A landlord and tenant have an on-going relationship and it is essential that the implications of VAT are considered and correctly dealt with when the lease is negotiated.
Many clients pay the HMRC as they would hope HMRC will not complain however VAT may not be recoverable and could add costs of up to 20% of the total value of a property. In addition, there are heavy penalties for failing to account for VAT when liable to do so, and interest may also be incurred. Similarly, HMRC can demand VAT to be paid several years later if it was paid and should not have been paid.
The sale of commercially property is generally exempt from VAT. Commercial property owners may however ‘opt to tax’ and charge VAT at the standard rate of 20%. In doing so, all supplies made in connection with the property, including rent, would attract VAT. An owner of a commercial property rental business may opt to tax a property if he or she is to incur significant refurbishment costs and wishes to recover VAT suffered on the works. Although this would mean that VAT could also apply to the disposal of the property.
You should also be aware of when your business needs to register for VAT. You must register if your turnover reaches the £85,000 mark in a 12 month period (this changes yearly), or you may decide to register voluntarily even though your turnover has not reached this threshold. For HMRC purposes you will need a VAT registration number if you pay VAT as a business.
Below are a few instances on when VAT may or may not be payable:

  • When there is Rent / Premium to be paid – VAT is chargeable as long as the landlord has opted to tax the property
  • Rent free periods – sometimes a landlord will allow for example three months rent free. In this instance VAT is not chargeable unless they are given in return for something from the tenant.
  • Break fee – VAT is not chargeable however if this is agreed separately from the Lease then VAT is payable.
  • Dilapidation – This represents a claim for damages by the landlord against the tenant’s ‘want of repair’. The payment involved is not the consideration for a supply for VAT purposes and is outside the scope of VAT.

This is just a brief overview on the position of VAT and you should always take advice from your accountant on tax issues.

For Commercial Property advice contact our Specialist Team on 0800 088 6004.