Supply: surrenders and reverse surrenders
A surrender occurs when a landlord pays a tenant to give up his lease or licence before the term of the agreement has expired. The supply by the tenant to the landlord is exempt unless the tenant has opted to tax the building, in which case it is standard rated.
From 1 April 1989 all surrenders were treated as a standard-rated supplies in the UK. But, the matter was taken to the European Court of Justice by Lubbock Fine (CJEC C63/92), a firm of accountants, and the Court ruled that surrenders are in fact exempt under what is now Article 135 (1)(l) of the Principal VAT Directive (subject to exclusions and the option to tax).
The term “reverse surrender” is used where a tenant pays a landlord to take back a lease. HM Customs and Excise had historically maintained that a “reverse surrender” was a taxable supply by the landlord of releasing the tenant from its obligations under the lease. However, to regularise the position, the Value Added Tax (Land) Order 1995 formally restored surrenders to Schedule 9 and added reverse surrenders to it, so that both were formally recognised as being capable of falling within the exemption.
However, in the case of Central Capital Corporation Ltd (VTD 13319), the Appellant challenged HM Customs and Excise’s position that reverse surrenders were standard rated until the change of law in 1995. The Tribunal upheld the appeal, finding that:
- a landlord made a supply when he agreed to accept the surrender of his tenant’s lease in return for payment,
- the supply was exempt by virtue of Article 135(1)(l) of the Principal VAT Directive.
We accepted the analysis of the Tribunal. It was accepted that reverse surrenders were, like surrenders, exempt, since the introduction of the tax, with the option to tax available from 1 August 1989.
Many people find surrenders and reverse surrenders confusing. The following table will help you to determine the liability of the supply:
|Landlord pays tenant to surrender the existing lease||EXEMPT* supply by the tenant|
|Third party pays a tenant to assign the existing lease||EXEMPT* supply by the tenant (the assignor)|
|Tenant pays landlord to take back the lease||EXEMPT* supply by the landlord|
|Tenant pays third party to take away lease||STANDARD RATED supply by the third party (the assignee)|
|Landlord pays a prospective tenant to accept the lease||STANDARD RATED supply by the prospective tenant (unless the payment is for no more than agreeing to accept a lease)|
- STANDARD RATED if option to tax is exercised by the person making
the supply (unless the option is disapplied). See VATLP22000 for information about the option to tax.