Her Majesty’s Revenue & Customs ("HMRC") has finally announced that it has changed its policy on the VAT treatment of a payment made by a landlord to a tenant as an inducement to the tenant to enter into a new lease.

Up until now HMRC has treated such payments as consideration for a standard rated supply of services by the tenant to the landlord. This is despite the decision of the European Court of Justice (ECJ) in Mirror Group Plc v The Commissioners of Customs & Excise (2001). In Mirror Group the ECJ held that the tenant was not making a supply at all unless the tenant had agreed to do something more than just accepting the grant of the lease. As an example the ECJ suggested that if a tenant specifically agreed to act "as an anchor tenant" this might be regarded as a supply. As the supply was not an exempt supply of letting it would attract VAT.

The HMRC line has been that a tenant will usually be doing something more than agreeing to enter into the lease and therefore VAT must be paid on an inducement payment. Following considerable lobbying by representative bodies, HMRC indicated some time ago that it would change its policy. The recent announcement has been expected for several months.

HMRC now accept that an inducement payment will not usually attract VAT; it would be outside the scope of VAT. However, HMRC has made it clear that where the tenant agrees to do something more than simply accepting the grant of a lease VAT would be payable. The following examples are given by HMRC as payments that will attract VAT:

  • carrying out building works to improve the property by undertaking necessary repairs or upgrading the property.
  • carrying out fitting-out or refurbishment works for which the landlord has responsibility and which it is paying the tenant to undertake.
  • acting as anchor tenant. This area is potentially difficult. Helpfully, HMRC has said that simply because there is publicity indicating that a prestigious company has taken a lease in a particular development will not of itself mean that that company is to be regarded as providing a service of being an anchor tenant to the landlord.

For there to be a supply a link between the giving of the payment and the tenant agreeing to do something (such as act as an anchor tenant) seems necessary, probably evidenced by the legal documentation or correspondence. In this respect the position is now similar to the treatment of rent-free periods.

Inducement payments made by an assignor on the assignment of a lease to an assignee continue to be subject to VAT.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 24/06/2005.