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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Option to tax anti-avoidance - funding and financing: other payments or transfers from tenant to owner - funding or not?: rents and service charges

In answer to a written Parliamentary Question in March 1997, it was confirmed:

‘… the measure has been drafted so as not to disturb ordinary arms-length commercial leasing arrangements and genuine speculative property development. In these circumstances a tenant simply paying rent is not providing the finance for the landlord’s initial purchase or construction of the building.’

Therefore, if the tenant is simply paying a normal commercial rent in accordance with the terms of the lease this is not deemed to be providing finance for the landlord’s initial construction or purchase of the building. Similarly, any service charges paid with rent under the terms of the lease would be treated in the same way.

In some situations the tenant may request an enhanced level of fit out, over and above the original contract, which the developer is prepared to pay for without direct reimbursement from the tenant. Instead for the first years of the lease, the tenant agrees to pay additional rent to meet this increased cost. This would not be seen as providing finance for the landlord’s development and is covered by the Minister’s statement.

However, if a tenant pays an amount of ‘rent’ which is used by the landlord to meet some of the development costs, he has provided finance for the landlord’s development. Any such payment, however it is described, will always qualify as the provision of finance.