Be careful what you barter for – VAT treatment of lease concessions transactions

Our team: Adam Baker


The unprecedented impact of Covid-19 on occupiers of commercial premises, particularly those in the retail and leisure sectors, has led to many landlords and tenants striking deals to waive or vary existing lease terms in a way that would have been unthinkable just a matter of months ago.

Sometimes the desire of landlords to retain a solvent tenant results in them agreeing lease concessions, for example a rent free period, without receiving any direct benefit from the tenant in the form of the tenant agreeing to vary one or more of its other obligations under the lease to the landlord’s benefit.

Barter Transactions

Sometimes, however, the parties will strike a deal where the liabilities and obligations under the lease are re-geared or restructured to provide some benefit for each party.  For example, a landlord may agree to a rent reduction for a period in return for a tenant agreeing to remove a break clause in the lease, reducing the landlord’s immediate income but giving them the benefit of a longer term certain.  These transactions are “barter transactions” for VAT purposes and it is important to be aware that they can have VAT consequences even though no money changes hands as each party can be treated as having made a VAT supply.

What Constitutes a Barter Transaction?

Over the summer HMRC published a briefing note (Revenue and Customs Brief 11 (2020): VAT and Stamp Duty Land Tax when existing leases between landlords and tenants are varied) which offered guidance on what sorts of lease variation transactions HMRC are likely to regard as barter transactions.  The guidance gives some general principles:

  1. If a tenant makes no payment (or a token payment) in return for a concession granted by a landlord then there is no supply; but
  2. If the tenant agrees to do something in exchange for the concession which goes beyond agreeing to accept the normal responsibilities of a tenant, such as paying rent, then it is likely that the tenant is making a supply. Whether that supply is taxable or exempt depends on what the tenant agrees to do.

Remaining Uncertainty?

However, the guidance does not offer clarity in all cases as it will not always be obvious whether what the tenant agrees to do goes beyond their normal responsibilities under the lease.

The guidance uses the example of the tenant carrying out building work as an obligation that would go beyond the tenant’s normal responsibilities under the lease. However, this is perhaps an unusual scenario in practice.  There may be other factual scenarios where it is more difficult to determine whether a tenant’s obligations go beyond their normal responsibilities or not or whether their value can be easily assessed.

Practical Points and Conclusions

Just because a transaction constitutes a barter transaction for VAT purposes, it does not mean that either party will necessarily pay VAT to the other.  If both parties have opted to tax the premises then it will often be the case that each party’s supply will be of equal value to the other and the parties will simply exchange VAT invoices for an equal amount.

However, many tenants do not routinely opt to tax their properties for VAT purposes and so may be more likely to make VAT exempt supplies in a barter scenario.  The tenant would in this case have to account to the landlord for VAT on the landlord’s supply, subject to the drafting of the transaction.

Landlords and their advisers should therefore make sure that the documentation allows them to demand VAT from their tenants in such circumstances and tenants should conversely be alert to unexpected VAT demands.

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