Policy paper

Revenue and Customs Brief 11 (2020): VAT and Stamp Duty Land Tax when existing leases between landlords and tenants are varied

Published 29 July 2020

1. Purpose of this brief

This brief explains how some arrangements between landlords and tenants affect VAT and Stamp Duty Land Tax (SDLT). There have been no changes to either VAT or SDLT policy but these changes have become more frequent as a result of the COVID-19 pandemic.

2. Who should read this brief

This brief applies to commercial properties. You should read the brief if you are:

• a landlord
• a tenant
• their adviser

3. Background

As a result of the current COVID-19 pandemic, many tenants are suffering a loss of income and want to vary the terms of their lease with their landlord. This may be done either formally or informally. This brief has guidance on the appropriate VAT and Stamp Duty Land Tax (SDLT) 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

In all cases, the correct VAT and SDLT treatment will depend on the actual agreements which the landlord and tenant enter into.

4. VAT

A landlord and tenant are free to vary a lease between them in any way they choose. This may benefit the tenant as a:

• period of reduced rent
• rent-free period
• rent holiday

If the tenant makes no payment or a token (peppercorn) fee there is no supply, and so no change in the tax liability of the supply made by the landlord to the tenant.

If, however, the tenant agrees to do something in exchange, this could be classed as a payment for a supply by the tenant to the landlord - unless they are only agreeing to accept the normal responsibilities of a tenant, such as paying rent.

If the tenant agrees to do something more, it is likely that:

• the tenant is making a supply and the rent reduction will be the value of the supply – whether the supply is taxable or exempt will depend on what the tenant agrees to do, in the same way as if they were being paid to do it
• the landlord must account for the VAT as though the rent was still being paid if they have opted to tax the property

If both supplies are taxable at the standard rate:

• the amounts of VAT due on each supply are likely to be the same
• the landlord and tenant will need to issue VAT invoices to each other if either of them is registered for VAT

5. Examples of possible changes

5.1 Landlord reduces the rental amounts payable but there are no other changes to the lease

Where the landlord has opted to tax, they will use the revised amount to account for VAT on the rent that is due. This is because the tenant is agreeing to continue to pay rent under the revised lease and so is not making a supply.

This will also be the case up to, or beyond, the expiry of the lease where the landlord:

• defers the rent by changing the time it is paid, or by paying on deferred terms
• changes the way the rent is calculated, for example basing the rent on the tenant’s turnover or adjusting the rent review arrangement

5.2 Tenant agrees to an extended lease or variation to a break clause in the existing lease

The tenant does not make a supply to the landlord just by agreeing to pay rent under an extended lease. Where the landlord has opted to tax, they will account for VAT on the rent that is due in line with the revised timing and values.

5.3 Landlord changes the terms and, in exchange, the tenant agrees to more than paying rent during the lease

The landlord and tenant are making a supply for VAT purposes. For example, the tenant may agree to do some work to the building for the landlord’s benefit. The tenant’s supply would be a taxable supply of construction services, and the landlord’s supply will be a supply of land that is exempt, unless the landlord has opted to tax.

5.4 New leases

If the tenant agrees to a new lease with new terms, they are not making a supply to the landlord just by agreeing. The liability of the landlord’s supply of the new lease will be exempt, unless both the following apply:

• the landlord has chosen to tax their interest in the property
• the option is not excluded or disapplied – you can find out more about this in Opting to tax land and buildings (VAT Notice 742A)

5.5 What to do if you have accounted for VAT incorrectly

If you discover that you have accounted for VAT incorrectly, you should:

• adjust your VAT return
• follow the error correction process

6. Stamp Duty Land Tax

Changes to a lease may affect SDLT. This might, for example, include:

• variations to existing leases
• the grant of new leases

If the tenant gives nothing in return for agreeing to the changes, there will not be any SDLT liability. They may, for example:

• allow clauses to be broken
• reduce their rent

Some arrangements, however, may result in an SDLT liability and a requirement to file a land transaction return with HMRC. These arrangements may include:

• extending the term of a lease – relief may be available for any rent on which SDLT has already been paid, often referred to as ‘overlap relief’
• the grant of a new lease which begins after the end of the current lease term, often referred to as a reversionary lease – any SDLT filing and payment liability will be from the date that the lease is signed or granted and not the date on which the lease term begins
• agreement by a tenant to carry out work on behalf of a landlord, for example in return for the landlord agreeing to reduce the rent payable
• the payment of any lump sum by either a tenant or a landlord in return for changes being made to a lease, or in return for the surrender of a lease

This list is not exhaustive. Both sides should, where appropriate, take advice from their agent about their SDLT liability.

7. More information

You can find more information about HMRC’s interpretation of tax legislation, including VAT and SDLT, by using our Non-Statutory Clearance Service.