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HMRC internal manual

VAT Land and Property

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HM Revenue & Customs
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Option to tax anti-avoidance - funding and financing: treatment of fit out works paid for by a tenant

A tenant is typically required to pay for some or all of the fit out works during the course of construction or reconstruction of a building. These payments can, in certain situations, mean that a tenant is treated as having financed the owner’s development of the building. This will be the case where the tenant pays, wholly or in part, for works which form part of the owner’s capital item.

Where a tenant pays for works which form part of his own capital item this is not the provision of finance. The key to establishing the capital goods scheme position is to work out who, as a matter of fact, is being supplied with the fit out works in any particular case. The following examples set out typical situations with an analysis of the capital goods scheme position:

Example 1

Developer contracted to provide shell and core and basic level of fit out with the tenant responsible for additional fit out costs which exceed £250,000 in value in their own right. The tenant contracts with a third party to carry out the additional works which are, in amount and nature, those that would normally arise between parties contracting at arms-length (ie if developer, supplier of fitting out services and tenants were all independent parties).

  • The developer has a capital item under Regulation 113(e) covering expenditure on shell, core and basic fit out.
  • The additional fit out works are supplied directly to the tenant and constitute a separate capital item under Regulation 113(h).
  • If the tenant pays for the additional fit out works and provides no finance to the developer the developer’s option to tax will be unaffected.

Example 2

Basic contractual arrangements as per example 1, with the trader paying for additional works, but this time they find it more convenient to procure the works via the developer. If the agreement makes it absolutely clear that the developer is making a separate supply of construction services to the tenant, in respect of the fitting out costs, with a separate consideration specified, the developer will be seen as a contractor supplying the fit out works to the tenant. It is not essential that the contract for the fit out works is separate from the lease agreement but, if it does form part of the lease, it must be a clearly identifiable part.

Analysis as per example 1.

Example 3

Basic contractual position as per examples 1 and 2, but this time the value of the fit out works supplied to and paid for by the tenant is £100,000.

  • The developer has a capital item under Regulation 113(e) covering the expenditure on shell, core and basic fit out.
  • The tenant does not have a capital item.
  • If the tenant pays for the additional fit out works and provides no finance to the developer the developers option to tax will be unaffected.

Example 4

Developer contracted to provide shell and core and all of the fit out works but requires tenant to make a contribution towards the cost of the fit out works, at the time of the development rather than via increased rental charges. The contribution by the tenant is further consideration for the lease and is exempt from VAT.

  • Developer has a single capital item under Regulation 113(e) which encompasses both the building and fit out costs.
  • The tenant has financed part of the developer’s capital item. Therefore the developer’s option to tax will disapply.