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VAT And Reverse Premiums

QUESTION: Is a reverse premium for the surrender of a lease or an inducement to enter into a lease subject to payment of VAT?

Revenue and Customs’ guidance says that if a landlord accepts the surrender of a lease in return for payment from the tenant, the supply of land will be an exempt supply, unless the landlord has opted to pay tax.

If the transaction is the other way round and the landlord pays the tenant or licensee to surrender any interest in, right over or licence to occupy land, then that is a supply of land to the landlord by the tenant and the supply land is also generally exempt, unless the tenant has opted to pay tax.

A variation of a lease can sometimes take the form of surrender of the old lease and the grant of a new lease. Where there is no consideration for the transaction, there is no supply of land. Where there is a payment, the payment received is exempt unless there is an option to pay tax.

However, supposing a landlord pays an inducement to a prospective tenant for simply entering into a new lease with the landlord, is this an exempt supply of land? Yes, but where an inducement is coupled with a benefit that falls outside normal lease terms - for example, where the tenant carries out improvements or acts as an ‘anchor tenant’ - this may constitute a supply that will be liable for VAT.

Quantifying the benefit could be difficult, but on the assumption that VAT can be calculated it is only likely to be recoverable if the landlord has opted to tax its interest in the land.

As a rule, a surrender of a leasehold interest or an inducement to enter into a lease, in the course of business, is exempt from a VAT payment, but VAT may be payable if one of the parties has opted to pay tax and waive the exemption.

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