The government has cut commercial landlords some slack as they renegotiate lease variations during Covid.

Certain lease variations will no longer be subject to VAT following an update from HMRC.  

Following earlier confusion regarding the tax implications of lease variations such as rent reductions or the creation of a rent-free period, the clarification is welcome news for landlords as it brings much-needed clarification to this area. 

The newly published Revenue & Customs Brief 11 (2020) has been issued in response to the increase in frequency of lease variations as result of the impact of Covid-19 on the commercial property sector.  

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During the crisis, it has often become necessary for landlords to renegotiate lease arrangements to allow for a rent-free period or for an extension to the term of the lease.  

As this action requires the tenant to agree to give up or vary their break right, this can be seen as a consideration for VAT purposes. 

The new guidance clears up any previous confusion by stating that a landlord and tenant are free to vary a lease between them in any way they choose.  

Benefits to the tenant such as a period of reduced rent, a rent-free period or a rent holiday will not have a tax liability as long as the tenant makes no payment for this change.  

Without a payment being made, there is no supply and so no change in the VAT liability of the supply made by the landlord to the tenant. 

Although HMRC claims there has been policy change regarding VAT with the issuing of this Revenue & Customs Brief, the guidelines offer welcome reassurance and clarification for landlords, tenants and tax advisers.  


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