In this case, the tenant becomes a principal contractor under his agreement to carry out Category A work for the lessor. Therefore, the excluded does not apply to the tenant`s own work when such work is considered “work” from the point of view of the RCT. During the Covid 19 pandemic, landlords and tenants increasingly vary their leases to accommodate the commercial difficulties of tenants. Subsequently, on July 29, 2020, HMRC issued guidelines on the types of lease fluctuations that could result in a VAT tax or an LTDS levy. Hmrc say this guide does not change their policy, but one might wonder if it is good. The contract was then drawn up with specific provisions indicating the price without any indication of VAT. It was also subject to general provisions, without the special provisions taking precedence over the general provisions. The general provisions contained the usual clause where that VAT can be added at the stated price. (For more details on the impact of this policy change on trade disputes and settlement negotiations, see our opinion here. This is a complex area, so please contact your local BDO VAT for more information.
While these are just some of the important areas of a commercial lease, we recommend that all commercial leases be tax-controlled to ensure that no potential VAT/RCT problems arise. Most of the deviations we have seen in recent times have been a reduction in rent. HMRC`s guidelines make it clear that a variant consisting exclusively of a rent reduction will not affect VAT or LTDS. However, the situation is less secure if the tenant agrees to do something in return. If the lease agreement includes a construction contract in which the tenant undertakes to carry out all the equipment work for the lessor/developer, the tenant is, with regard to his contract with his owner, a principal contractor with respect to the work equipped for the purposes of RCT. This means that, in the context of leases in which a termination clause of a tenancy agreement is exercised, there is always an exempt VAT delivery (unless the tax option has been exercised by the party receiving the payment), whether or not the amount of the break tax is provided for in the lease. For example, if the tenant pays the break fee, he is subject to VAT if the lessor opted for the tax (which would have previously been outside the scope of VAT if it was considered to be compensation that was one of the conditions of the granting of the original lease). HMRC has always recognized that rental payments, whether by the lessor or tenant – the latter is often referred to as a “reverse rebate” – are payments for the supply of land, so that the payment is exempt from VAT, unless the party receiving the payment has taken a tax option, in which case it is considered the norm. For example, if a landlord and tenant agree to a six-month rent-free period in exchange for the tenant who agrees to extend the lease by six months, or agrees to carry out certain work on the property or to remove a break-up clause, it may be an exchange with VAT effect. When drafting purchase or lease agreements, there is a well-known principle that prices are indicated less VAT, but the contract expressly reserves the right to add VAT to the seller or lessor. This is because any contract that does not mention that one can add to VAT indicates that it only indicates the exact amount.
This situation is reinforced by the fact that VAT legislation treats the “counterpart” of all goods or services as an amount, including VAT.