The main rate of VAT is to be increased from 17.5 per cent to 20 per cent with effect from 4 January 2011 (Section 3 Finance (No. 2) Act 2010). This note sets out how HMRC Stamp Taxes proposes to treat this change as it affects leases where the landlord has the right to require the tenant to pay any VAT chargeable on the rents.
FA 2003 Schedule 4 paragraph 2 provides that VAT should be included in the consideration charged to SDLT.
HMRC's current view is that the amount to be brought into the chargeable consideration should reflect the VAT rate position known at the effective date of the transaction. On that basis, subsequently legislated changes to the rate of VAT do not affect the computation of SDLT liability or create the need for a further return.
The sections below explain how VAT will be treated depending on whether the effective date of the lease is before, on or after 27 July 2010 which is the date Section 3 Finance (No.2) Act 2010 came into force.
The calculation of Net Present Value (NPV) should take into account VAT at the rates applicable to the appropriate proportions of the first five years of the lease. The VAT on the rent payable for the period from the effective date to the day preceding the first rent payment date on or after 4 January 2011 should be calculated at 17.5 per cent. The VAT element on the rent payable on and from the first rent payment date on or after 4 January 2011 should be 20 per cent.
So, for example, if the rent is payable on the usual quarter days, the whole of the December 2010 quarter's rent (and the earlier rent) can be included at 17.5 per cent as the tax point will be 25 December 2010 (or earlier), that is, before the VAT increase on 4 January 2011.
A further return is not required just because the rate of VAT has changed, because FA 2003 Schedule 17A(7) (leases with variable or uncertain rent) is not activated by a change in the VAT rate.
However, for any lease with variable or uncertain rent, a return will usually be required in line with the normal rules.
In those circumstances, the review required by Schedule 17A paragraph 8 should include the rents paid inclusive of any VAT (Schedule 4 paragraph 2) by reference to the actual rate of VAT applying at the respective times. The calculation will use the highest rent actually paid for any 12 month period in the first five years of the term for the whole of the remaining term (Schedule 17A paragraph 7(3)).
Any return resulting from such a review has a revised effective date: the end of the fifth year of the term or, if earlier, the date at which the rent payable in the first five years of the term becomes certain. This applies for all purposes apart from interest, where the effective date remains the original effective date (Schedule 17A paragraph 8(4) and Section 87(5)). Interest will be charged on underpayments and added when tax overpaid is repaid.
This guidance will be included in the Stamp Duty Land Tax Manual in due course. Please address any queries in writing to the Technical and Guidance Team in our Birmingham Office.
