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Top tips for tenants: SDLT and VAT

Taxes should be at the forefront of a tenant’s mind when taking a lease of new premises or re-gearing an existing lease. This article looks at the SDLT and VAT implications of some typical transactions involving tenants.

The Basics

Stamp Duty Land Tax

SDLT is levied on “land transactions” which is defined as the “acquisition” of a “chargeable interest” (in section 43 Finance Act 2003).

A chargeable interest is:

  • any estate, interest, right or power in or over land situated in the UK;

  • the benefit of any obligation, restriction or condition which affects the value of such an estate, interest right or power.

The purchaser in a land transaction is the person who has given consideration, or who is a party to the transaction. This person must deliver an SDLT return to HMRC within 30 days after the effective date of the transaction (assuming the transaction is notifiable). For leases, the effective date will usually be the date of completion or when substantial performance takes place. (This will be a question of fact, and usually takes place when the purchaser obtains the keys and takes possession of the property, or when rent is paid.)

Most leasehold transactions are notifiable, but the following are not:

  • the grant of a lease for a term of seven years or more where the chargeable consideration other than rent is less than £40,000 and the annual rent is less than £1,000

  • the assignment or surrender of a lease where the lease was originally granted for a term of seven years or more and the chargeable consideration for the assignment or surrender is less than £40,000

  • the grant, assignment, or surrender of a lease for a term of less than seven years where the chargeable consideration does not exceed the zero-rate threshold

SDLT is paid on the chargeable consideration, and includes any money or other consideration, given directly or indirectly, by the purchaser or by a person connected with the purchaser. Chargeable consideration includes VAT.

Value Added Tax

VAT is charged on goods and services provided commercially. Generally, supplies of interests in, rights over, or licences to occupy commercial property are exempt supplies, unless an option to tax has been exercised, and such option has not been disapplied or revoked. There are other exemptions where commercial property will be treated as a standard rates supply: these usually relate to new builds, rights to take game or fish, provision of holiday accommodation, or grant of parking facilities.

Typical transactions involving SDLT & VAT

Grant of a lease

High-end luxury jeweller Sapphires takes a lease in West Place, a newly opened West End shopping centre, for a ten-year term at a rent of £100,000 per annum for the first five years. There is an open market rent review on the fifth anniversary of the term.

No agreement for lease has been entered into and the parties complete the lease on 1 December 2017.

The landlord has confirmed during the course of the due diligence process that it has opted to tax the centre.

What are the VAT implications?

In this very simple case, Sapphires will need to pay VAT on the annual rent as the landlord has opted to tax its interest in West Place. VAT will be payable throughout the term, provided that the option is not revoked or disapplied at any stage.

What are the SDLT implications?

A grant of a lease is a chargeable interest. As the lease is for more than seven years, and annual rent is above the £1,000 minimum threshold, it is a notifiable transaction. Therefore an SDLT return must be submitted to HMRC by 31 December 3017. SDLT is payable on the chargeable consideration, which in this case is the annual rent plus the VAT on the annual rent, £120,000 in Sapphires’ example.

Grant of a Lease pursuant to an agreement for lease

Taking the example above but tweaking it slightly, Sapphires has entered into an agreement for lease in which it is permitted to take occupation before completion of the lease to carry out fit out works to its unit in West Place. Sapphires took occupation of the premises on 1 November 2017 and completed a month later on 1 December 2017.

What are the VAT implications?

Sapphires will still need to pay VAT on the annual rent as the landlord has opted to tax its interest in West Place. This has not changed.

What are the SDLT implications?

The SDLT implications are as set out above, save that we need to consider if and when substantial performance has taken place prior to completion of the lease. Sapphires took possession of the property to commence its fit out works on 1 November 2017, so it can be concluded that substantial performance has taken place and a stamp duty land tax return must be filed at HMRC within 30 days.

Grant of a Lease with a turnover rent payable

In this variation, Sapphires has agreed to pay a turnover rent of 10% on all sums over the base annual rent of £100,000 per annum.

What are the VAT implications?

These remain as above.

What are the SDLT implications?

If a turnover rent is payable, the rent payable by Sapphires will be uncertain and therefore for the purposes of submitting an SDLT return Sapphires should give a reasonable estimate of the total rent (i.e. the base rent and the turnover rent) that will be payable.

At the end of the fifth year of the term (or, earlier, if the rent for the first five years’ rent becomes certain) the SDLT should be recalculated, and if more SDLT is due, a further return should be submitted, and the additional tax should be paid. Interest will be payable on the additional tax. If too much SDLT was paid when the first stamp duty return was submitted, then Sapphires can reclaim the overpayment together with interest from HMRC.

Surrender of a lease

In this variation West Place is undergoing an extensive refurbishment and the landlord wants Sapphires to surrender its lease. In consideration for this, it has agreed to pay Sapphires a premium of £100,000. Sapphires has opted to tax its leasehold interest in the premises.

What are the VAT implications?

The surrender by Sapphires of its lease in return for £200,000 paid by the landlord is a supply by the tenant to the landlord.

Whether VAT is payable by the landlord on the surrender premium depends upon whether or not Sapphires has opted to tax the premises. In our scenario Sapphires has, so VAT is payable on the surrender premium.

What are the SDLT implications?

The surrender of a lease is chargeable interest.

The lease was for a ten year term and the chargeable consideration exceeds the zero-rate threshold, so the Landlord must pay SDLT on the surrender premium. As Sapphires has opted to tax the premises, SDLT is payable on the VAT also.

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