HMRC has released very helpful guidance confirming that they do not consider that a number of commonly agreed landlord and tenant lease concessions should be classed as barter transactions for VAT purposes. As commented on in our previous Law-Now on barter transactions, during the coronavirus outbreak there has been a marked increase in lease concessions being given in exchange for landlord favourable lease variations. The classification of such arrangements as barter transactions has had VAT implications for both landlords and tenants and has caused a considerable administration headache at a time when such arrangements need to be entered into quickly to assist tenants struggling during the COVID-19 period.
The new guidance has been introduced following discussions between HM Revenue & Customs and various industry bodies. It provides welcome clarification that certain commonplace lease variations agreed to by tenants for rent concessions etc should not be considered as taxable supplies. The updated guidance is helpful in relation to the numerous transactions that are taking place in the market in response to the challenges COVID-19 presents for landlord and tenants and confirms that the following situations will not constitute a barter for VAT purposes:
- where a landlord gives a rent free, rent reduction or rent holiday and the tenant is doing nothing in return and there are no other changes to the lease;
- where, as part of the arrangements, the tenant agrees to extend the term of the lease, enter into a reversionary lease or agrees to a variation to the break clause in the existing lease, whether by removing that break clause or pushing out the date on which it can be exercised; or
- where the tenant is taking a new lease with new terms.
In the above situations the parties no longer need to treat the transaction as a barter.
It should be noted that outside of variations to break rights there are still a number of landlord and tenant deals where the VAT barter regime is relevant. For example, where a tenant agrees to carry out works for the landlord in return for a lease concession, land swaps and on mutual releases of rights of light.
Please contact the CMS team if you would like to discuss this further.