COVID-19 – Revising lease terms and barters

18 June 2020

30 July 2020

HMRC have published RCB 11/2020 on the VAT and SDLT impact of lease variations.

The Guidance covers a number of scenarios but is less comprehensive than we had hoped for.  Therefore, our advice remains that a Landlord and Tenant should actively engage in discussions to ascertain and agree:

  • Whether the Tenant is making any supply to the Landlord in return for a consideration and vice versa.
  • The value of the consideration for these supplies (which may be less than the value of any rent free period offered).
  • The VAT treatment of the supplies being made.
  • Contractual protection for both parties should HMRC take a differing view.

Please do not hesitate to contact Richard Dalton if you would like to discuss this further.

The VAT implications of revising property lease terms and barters 

Many landlords will be finding that a number of their tenants are struggling to pay their rent and this is leading to discussions about ways landlords can help with the cash flow issues resulting from this current lockdown.  This could involve agreeing rent free periods or simply agreeing to defer payment of the rent.

Where the landlord is simply agreeing to defer the rent payments, or gives the tenant a rent free period without anything in return then there are unlikely to be any VAT consequences.  However, most landlords will be seeking something in return and for VAT purposes consideration does not always have to be monetary.

Therefore, for example, where a landlord and tenant agree to a six month rent free period in return for the tenant agreeing to extend the lease by six months, or agreeing to carry out some work to the property, or to remove a break clause this is potentially a barter transaction with VAT consequences. 

HMRC’s view is that if the landlord grants a rent free period in return for the tenant doing something then both parties have potentially made a supply for VAT purposes.  These supplies are likely to be of equal value and may have the same VAT liability but this needs to be considered. 

If the landlord has opted to tax HMRC will expect them to account for VAT on the value of the rent forgone and a failure to do so could lead to penalties and interest. Depending on the terms of the agreement with the tenant, especially if it is silent on VAT, the landlord may also face issues collecting the VAT.  It may also be necessary for the parties to consider whether the proposed variations to the lease constitute a surrender and re-grant of the lease for VAT purposes; a factor which could have unexpected VAT and other implications for both parties but particularly the tenant if it has not opted to tax its interest in the property.  So while landlords are thinking that they are helping their tenant in these troubling times by agreeing a rent free period, it is possible that both parties may end up with their own unexpected VAT cost. Something that was not anticipated and which could potentially have been avoided.

This is a complicated area so please feel free to reach out to your local BDO VAT contact for further information.

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