The VAT increase from 17.5% to 20% on the 4th of January 2011 will influence the amount of Stamp Duty payable on commercial leases. Stamp Duty Land Tax (SDLT) is payable on the grant of a new commercial lease and is based on the NPV (Net Present Value) calculation. This amount is calculated using the rent payable over the term of the lease and in addition, the VAT paid on top of that rent.
So what happens if your lease was completed before the increase in VAT but the term of that lease includes the period where VAT has been increased? HMRC have issued some guidelines to assist and we have summarised these below.
The NPV calculated on the grant of a new lease on or after the 27th July 2010 must include the increase of VAT. The NPV will be calculated so as to include VAT at 17.5% for the rent due on September and December 2010 quarter days but after that NPV must be calculated using the new rate of 20%.
In the event that the rent payable under a lease is variable or uncertain due to the lease having rent review provisions, the NPV is calculated by making a reasonable estimate of the rent for the first five years. Then a further NPV calculation is made when the rent is reviewed and agreed or at the end of the fifth year of the term. This further calculation must take into account the 20% VAT rate on rent due after the 4th of January 2011.
For leases with an effective date prior to the 27th July 2010 (the date of the legislation bringing about the VAT increase) and granted between 4th January 2006 and 27th July 2010, an Inland Revenue tax return will not be necessary just because the rent varies due to the increase in VAT. The legislation provides that the VAT rate change does not in itself cause the rent to be varied and a revised NPV calculation and Stamp Duty Land Tax return is not required.
For further guidance please see the HMRC website at https://www.hmrc.gov.uk/so/vat-changes.htm
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