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HMRC internal manual

VAT Land and Property

From
HM Revenue & Customs
Updated
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Option to tax anti-avoidance - funding and financing: other payments or transfers from tenant to owner - funding or not?: lease premiums

Whether a lease premium payable by the prospective tenant constitutes the provision of finance will depend upon the timing of the agreement to pay the premium (or, if there is no prior agreement, the timing of the actual payment itself). An agreement to pay a premium that is entered into before or during the course of construction, and which is intended at that time to be used by the developer as security or as a guarantee to obtain third party financing for the development, is finance for that person’s development of the land.

The same will also be true if it is intended at the time of entering into the agreement that the premium (or part of it) is actually paid to the developer before or during the course of construction to be used by it to meet some or all of the construction costs, or as security or as a guarantee for third party funding.

However, there is no provision of finance if the developer has to meet the full cost of the development itself and has received no financial advantage, in terms of meeting the costs of the development, from the tenant. If the agreement to pay the premium is entered into after the construction costs have been met (or, where there is no prior agreement, all of actual premium itself is paid after the construction costs have been met), this is not deemed to be the provision of finance.

Similarly, if financing has already been obtained from other sources, the premium will not be regarded as constituting the provision of finance. Two examples of such other sources of finance are an unconnected third party and the developer’s own existing funds.

Where a developer has already obtained finance but has two or more developments running, such that it has not secured enough funds fully to finance all the developments, use of an agreement to pay a premium (or the whole or part of the actual premium payment) to obtain such finance will constitute the provision of finance for the purposes of the measure.