On 4 January 2011, the standard rate of VAT will increase from 17.5% to 20%. HM Revenue & Customs has issued guidance on the impact that the increase will have on stamp duty land tax (SDLT) on non-residential leases. This e-mail summarises the key points from that guidance.
SDLT on non-residential leases
The amount of SDLT chargeable on the grant of a lease over non-residential property is based on the net present value (NPV) of rent. For SDLT purposes, the NPV of rent means the rent payable over the entire term, and includes any standard rate VAT which is due on rent because the landlord has opted to tax the property before the grant of the lease. If the landlord makes an option to tax after the grant of the lease, the VAT is not included in the SDLT calculation.
For leases where the rent is variable or uncertain, the NPV still must be calculated for the whole term. This is done by making a reasonable estimate of the rent payable for each of the first five years of the term, and using those figures for years one to five of the NPV calculation. The highest annual amount payable, or estimated, for any of those first five years is taken to be the annual rent for each year of the rest of the term.
There is usually a requirement to review the NPV calculation at the earlier of: the end of the fifth year of the term of the lease or the date when the rent payable in the first five years can be ascertained. If, on that review, the SDLT is greater than previously returned, then a revised return should be made within 30 days of the review date.
VAT leases granted on or after 27 July 2010: new VAT leases
The NPV for a VAT lease with an effective date falling on or after 27 July 2010 should take account of the January 2011 increase in the standard rate of VAT. Therefore, typically, the NPV calculation will include:
• VAT at 17.5% for rents due on the September and December 2010 quarter days.
• VAT at 20% for rents due on subsequent quarter days.
VAT leases granted after 4 January 2006 (and before 27 July 2010): old VAT leases
A further SDLT return is not necessary solely because of the increase in the rate of VAT. However, if ignoring VAT, the rents payable under the lease are variable or uncertain so that a further SDLT return will be necessary when the rents become ascertained, the new NPV calculation should take account of the increased rate of VAT.
What are the implications for business tenants?
The guidance on old VAT leases will come as a relief to many tenants who were faced with the prospect of having to review and submit further SDLT returns for all old VAT leases as a direct result of the increase in the standard rate of VAT.
Tenants with old VAT leases will be treated differently according to whether they have a lease where the rents are certain or a lease where the rents are variable or uncertain.