VAT rates have fluctuated over the last 2 years whereas historically they have stayed fairly constant. The standard VAT rate was 17.5% from 1991 until 2008 when, in an attempt to boost the flagging economy, the rate was lowered to 15% between 1 December 2008 and 31 December 2009. Since then the rate has returned to 17.5% but in the new Government's first budget in June the Chancellor announced that the rate will increase to 20% from 4 January 2011.
VAT on rent
The tax point for rent is usually either the date when the tenant pays the rent, or the date when the landlord issues its VAT invoice, whichever happens first. The VAT rate which should be taken into account is the one in force at that tax point. Assuming that rent is paid in advance on the usual quarter dates, the 25 December 2010 rent demand should therefore include VAT at the rate of 17.5% and the 25 March 2011 demand should include VAT at 20%.
If the landlord issues a VAT invoice for the whole year ahead stating the rent and VAT due, payment dates and VAT rate then the tax point is the date when payment is due or received, whichever is first. If the VAT rate changes during the year then a new VAT invoice must be issued in respect of those payment dates which fall after the rate change.
Where rent is paid in arrears, the landlord can choose to use the transitional rules available for supplies that are in progress on 4 January 2011. These rules allow the landlord to apportion the VAT between that part of the rent payment period which falls before 4 January and the remainder. Follow this link for more information about these rules: http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-increase.htm#2
Apportionment is preferred by tenants who cannot recover VAT on rent in full.
VAT and SDLT
SDLT on a lease at a rent which is subject to change has initially to be computed on the basis of an estimate of that rent over the first five years of the lease. Once the rent is finally known, a further SDLT return must be made. Rent for these purposes includes any VAT on the rent where an option to tax is in place when the lease is granted.
As a result, since the VAT increase was announced, there has been some uncertainty as to how SDLT should be calculated on leases being granted now. Then on 6 October HMRC issued a guidance note setting out the prescribed method, and on 16 November 2010 published some worked examples: http://www.hmrc.gov.uk/so/vat-increase.htm
The guidance distinguishes between leases with effective dates before 27 July 2010 (which is the date when the Finance (No. 2) Act 2010 came into effect) and those with effective dates on or after 27 July. The effective date is when the tenant becomes contractually bound to enter into the lease, makes its first rental payment or takes occupation of the premises, whichever happens first.
Effective date before 27 July 2010
For leases with an effective date between 4 January 2006 and 27 July 2010, the change in the VAT rate will not of itself trigger an obligation to submit a new return. However, if a fresh return is required because there is a variable or uncertain rent, then the calculation will include the VAT actually paid during the relevant 5 year period. This interpretation contrasts with HMRC's guidance in respect of the rate change in 2008 which they decided would render the rent variable or uncertain.
Effective date after 27 July 2010
For leases with an effective date on or after 27 July 2010, the net present value of the lease should be calculated on the basis of VAT at 17.5% on rent paid up to the day before the first rent payment date occurring after 4 January 2010, and 20% thereafter. So, assuming the traditional quarter dates, if you are calculating SDLT on a recently granted lease then you should include VAT at 17.5% on the rent paid until 24 March 2011 and at 20% in respect of all rent paid from 25 March until the end of the year.
If this approach has not been adopted then you should recalculate the SDLT and pay any extra due. You can submit this sum using a letter to the Birmingham Stamp Office rather than completing a new SDLT return. HMRC have said unofficially that they will charge 3% interest on the extra tax due but, provided that payments are made promptly, they will not charge any penalties for late payment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
