The VAT implications of landlord and tenant barter transactions

United Kingdom

There has been a marked increase in lease concessions being given in exchange for landlord favourable variations - for example additional rent free periods being agreed for the removal of a future tenant break. These are presently classed as barter transactions and can have VAT implications. This briefing is designed to assist landlords, asset managers and tenants in their consideration of such transactions and related discussions.

What is a barter?

Where transactions are entered into in payment for one another rather than for monetary consideration this is defined as a “barter” for VAT purposes.Each party’s supply to the other constitutes the consideration they are providing in return for the supply made to them under the “barter” principle.

This means that even where no monetary consideration is being paid under a lease variation the parties can be treated as making a supply of the property for VAT purposes.

For example:

A tenant agrees to the removal of a tenant break clause in exchange for the grant of a rent free period by a landlord.

Tenant supply =removal of break clause

Landlord supply = grant of rent free period

A barter involves something going in each direction. Therefore, simple rent holidays or rent reductions being granted by landlords as part of the current COVID climate with nothing else being done by the tenant would not be a barter.

What is VAT charged on?

VAT is charged on the money’s worth value of the supply. How easy this is to calculate will be fact specific. In most barters, the value of the supplies is equal as the parties are unconnected and acting at arm’s length. Using the example above, the parties may agree that the value of the rent free period is equal to the net rents that would have been charged had the rent free period not been granted and so agree that the removal of the break right has the same value as that of the rent free.

Does either party pay VAT?

In most barter transactions, the value of the supplies will be equal.If both parties have opted to tax the property and agree the supplies have equal value, they will simply exchange VAT invoices (i.e. in that way record the transaction without any money changing hands).This becomes merely an administrative matter of exchanging invoices (albeit an important administrative matter).

However, not all tenants will have opted to tax the property and so their supply of the property in a barter would be exempt. If a tenant has not opted to tax the property it will have to pay VAT to the landlord. In those circumstances, at the very least, that will be a cash flow cost for the tenant.

Please contact the CMS team if you would like to discuss this further.