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HMRC internal manual

VAT Land and Property

Option to tax anti-avoidance: further examples of arrangements between landlords and tenants. Is there a provision of finance?

VATLP24750 – Option to tax anti-avoidance: further examples of arrangements between landlords and tenants. Is there a provision of finance?

The anti-avoidance test was introduced in 1997 and was designed to counter avoidance structures that had become common in the 1990s; however, its application does not require an avoidance motive to exist. The ways in which projects are financed have developed in the period since 1997. The examples below have been added to reflect a number of typical arrangements now commonly adopted.

Example 1

A prospective tenant agrees to make an additional payment in order to get first option on a desirable building. The payment takes the form of a premium payable on completion of the lease.

The premium is further consideration for the lease and would not be treated as the provision of finance.

Example 2

A tenant carries out work of a capital nature on the landlord’s building and receives payment from the landlord. Subject to application of normal supply rules, this may be viewed as simply a supply of construction services by the tenant to the landlord for a cash payment to the value of those supplies.

Despite the fact that payment flows from the landlord to the tenant, such an arrangement could still amount to a provision of finance, if either or both of the following apply:

  1. the amount paid is less than would be expected in a normal commercial arrangement (and no satisfactory explanation for why the payment is lower is provided), and/or
  2. there is an “abnormal time delay” before payment is made.

For the purposes of (2) above, HMRC would normally expect payment to be made promptly following the completion of the works. An example of what would be considered to be an“abnormal time delay” is:

  • the tenant allows an excessively long period before requiring payment and is unable to provide a satisfactory commercial explanation for the delay. In such cases, it will be assumed that the funds that would have been used for paying for the services in question have been used, for a period at least, to finance the landlord’s development.

However, where the work is treated as a taxable supply (and a tax invoice is issued) and neither (1) or (2) above apply, this would not be considered a provision of finance.

Example 3

A tenant carries out work of a capital nature on the landlord’s building. Subject to normal supply rules, this may be a taxable supply where the landlord allows a rent free period rather than making a payment for the works (barter).

This would not be seen as the provision of finance, as long as:

  1. the value of the rent free period reflects the value of the work undertaken by the tenant and
  2. a tax invoice is issued by each party in respect of their supplies (Please note, the arrangements amount to a barter and the issue of a tax invoice ensures that a tenant making exempt supplies incurs sticking tax on the supply received for the rent free period).

Example 4

Single or multiple payments are made by a tenant during construction in return for changes to the specification of the landlord’s building.

The tenant would not be seen as a development financier, as long as the payments are in return for taxable supplies and are consistent with normal commercial arrangements. For example, payments made “abnormally early” would not be seen as consistent with normal commercial arrangements and would therefore be construed as funding.

For the purposes of the above, HMRC would normally expect payment to be made after the completion of the works, unless the contract provides for stage payments. In particular, the following are examples of payments that could be considered as made “abnormally early”:

  • any payment made before completion of the specified  works, where the funds are used to pay for building costs other than the tenant’s changes.
  • payments exceeding the cost of the modifications.

HMRC does not require any specific records to be kept to evidence the link between payments made and works carried out; however, developers are advised to ensure that there is an audit trail, particularly where those sums are material.

Example 5

As for Example 4, however where reimbursement takes the form of a reduction in the rent free period.

This is not the provision of finance.

Example 6

As for Example 4, however where reimbursement takes the form of higher rentals.

This is not the provision of finance.

Example 7

As for Example 4, however where reimbursement takes the form of a single payment on the grant of the lease.

This is not the provision of finance, as long as the payment:

  1. is either consideration for a supply of construction services or for the supply of an interest in land in the form of a premium, and
  2.  is not made abnormally early (as defined in example 4, but see below), and
  3. corresponds (as appropriate) to the value of the works undertaken or the market value of the lease.

Please note that as the payment in this example is made at the time of the grant of the lease, it is assumed that it is made at a time when construction has been completed. The single payment would not, therefore, be expected to be made abnormally early.

Example 8

A landlord’s building requires dilapidations work. The prospective tenant agrees to carry out the required work in return for reimbursement by the landlord.

This would not normally be seen as the provision of finance, as the flow of funds is from the landlord to the tenant. Instead it would be a taxable supply by the tenant to the landlord.  It is expected that in the majority of cases the payment would be made in advance of the work being carried out or would be staged according to the progress of the work done. However, where there is an abnormal time delay (as defined in example 2), between the work being undertaken and receipt of payment by the tenant, this would be construed as a “loan” to the landlord and therefore seen as the provision of finance.