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VAT and SDLT on lease variations – Revenue & Customs Brief 11 (2020)

The COVID-19 pandemic has resulted in many commercial tenants being unable to pay their rent and HMRC issued a Brief over the summer, summarising the tax treatment of lease variations.  This brief was consistent with prior HMRC guidance.

VAT

The brief mentions three possible variations; a period of reduced rent, a rent-free period and a rent holiday.

Generally, where the tenant does not provide anything to the landlord, there is no supply by the tenant for VAT purposes.  If, however, the tenant does provide something in exchange, the lease variation could be considered as a payment for a supply by the tenant to the landlord, which may trigger a liability to VAT.

The brief gives the following examples:

–           The landlord reduces the rent (or agrees to delayed rent payments) but there are no other changes to the lease.  Where the landlord has opted to tax, they will account for VAT on the reduced rent.  There will be no supply by the tenant and therefore no other liability to VAT.

–           The tenant agrees to an extended lease or variation to a break clause in the existing lease.  Again, there is no supply by the tenant and so no VAT implications.

–           The landlord changes the lease terms and, in exchange, the tenant agrees to new obligations (in addition to paying the rent).  The tenant is making a supply which may be taxable (for instance construction services), and the landlord’s supply is an exempt supply of land unless the landlord has opted to tax.

Stamp Duty Land Tax

Similarly to the position for VAT, if the tenant provides nothing in return for the lease variation, no SDLT liability will be triggered.

However, some arrangements will trigger a charge to SDLT, for instance:

• extending the term of a lease – relief may be available for any rent on which SDLT has already been paid, often referred to as ‘overlap relief’.
• the payment of a lump sum by either the tenant or the landlord in return for changes being made to a lease, or in return for the surrender of the lease.

SDLT for non-UK residents

As announced last March, the Treasury has now published draft legislation (a new schedule 9A to FA 2003) and guidance for the 2% SDLT surcharge on acquisitions of residential property by non-residents, which comes into effect on 1 April 2021.

The surcharge will apply if one or more purchasers is non-resident.  For this purpose, an individual will be UK resident if they are present in the UK for at least 183 days during any continuous 365-day period in the ‘relevant period’, which begins 364 days before the effective date of the transaction and ends 365 days after that date.  There are special rules for co-purchasing spouses, partnerships etc, and provisions for the repayment of the surcharge to individuals who become UK-resident after submitting their land transaction return.

A company will be non-resident if it is not UK resident for corporation tax or, where the company is resident but is a close company, it meets the non-UK control test.

The surcharge will be 2 % above the applicable residential rate.  This means that the non-resident 2% surcharge will apply in addition to the existing 3% surcharge which most foreign buyers already have to pay, as a result of already holding one or more residential properties in the UK or abroad.  Foreign buyers will therefore pay SDLT at 17% on the top slice of the purchase price.

Similarly, the 2% surcharge will apply to non-resident companies purchasing residential properties in the UK.  This applies on top of that company’s underlying SDLT position.  So, if it is already subject to a flat 15% higher rate on the full consideration, it will now be a flat rate of 17%.  If, however, the flat rate 15% doesn’t apply (due to an exemption), and the sliding scale surcharge rates are relevant, the new 2% surcharge goes on top of the pre-existing scale, meaning the top rate of 17% only applies to the top slice.

HMRC’s review of job retention scheme claims

In July, the ATT (association of taxation technicians) reported that HMRC had issued their first set of coronavirus job retention scheme (CJRS) compliance letters, as part of the post-transaction review phase of the scheme.  HMRC were understood to be focusing on fraudulent claims rather than cases where the employer had made an innocent error.  Indeed, their guidance states: ‘We will not be actively looking for innocent errors in our compliance approach.’

The guidance also provides that the deadline for correcting overclaims (without incurring a penalty) is the later of:

• 90 days after the date the employer received the grant they were not entitled to;
• 90 days after the date the employer received the grant that they are no longer entitled to keep because their circumstances have changed; and
• 20 October 2020.

More recently, on 7th September, giving evidence to the Public Accounts Committee Jim Harra (HMRC’s head) confirmed that HMRC had so far received about 8,000 calls to its job retention scheme ‘report a fraud’ phone line, and was separately currently looking into 27,000 ‘high-risk claims’.  HMRC currently assume a 5%–10% error and fraud rate for claims under the scheme, representing up to a potential £3.5bn.

Now is clearly the time for employers who have claimed under the scheme to make sure that their house is in order, particularly since the line between an ‘innocent mistake’ and ‘fraud’ can become blurred when a mistake is knowingly left uncorrected and no repayment is made.

HMRC have published a set of Q&A’s on the application of the statutory residence test (SRT) during COVID-19.

These cover various examples of circumstances which will be considered ‘exceptional’ so that days spent in the UK will not count for the purpose of the SRT.

For example:

• Circumstances are exceptional when the Foreign and Commonwealth Office (FCO) advises against non-essential traveling.
• The closure of international borders can amount to exceptional circumstances, but only if it means that an individual is actually unable to leave the UK (because they do not fall within any of the exceptions).
• A period of self-isolation counts as exceptional circumstances.
• Staying in the UK to support vulnerable individuals can qualify as exceptional circumstances, depending on the specific facts.
• Any day on which an individual works in the UK for more than 3 hours will count as a UK workday, even if they are days which would have been disregarded for other tests due to exceptional circumstances.