Calculating VAT on Leases From 1 December 2008

Changes to VAT announced in the Pre Budget Report 2008 affects the calculation of the net present value (NPV) where VAT is charged on the rent.

When calculating VAT, the tax point for rental payments is the date on which a VAT invoice is issued or a payment is received, whichever is the earlier. The rate that is in force at the tax point will be the rate that applies.

Effective date of lease on or after 1 December 2008

If the effective date of the grant of a lease is on or after 1 December 2008 you should estimate the NPV using the following VAT rates:

• 15 per cent to 31 December 2009
• 17.5 per cent from 1 January 2010

Effective date of lease on or after 1 January 2010

Where the effective date of the lease is on or after 1 January 2010 the VAT rate of 17.5 per cent will apply.

VAT changes result in a variable or uncertain rent

As a result of the VAT changes at Pre Budget Report 2008 rents which include VAT in the NPV calculation will be viewed, for Stamp Duty Land Tax (SDLT) purposes, as rents which are variable or uncertain.

When the amount of rent payable for the first five years of the term of the lease becomes certain the purchaser can review the NPV payable on the rent and submit a return to HM Revenue & Customs (HMRC). At that point if NPV calculation was based on the VAT rate of 17.5 per cent and resulted in an overpayment a claim for repayment can be made.

When the VAT rate returns to 17.5 per cent again on 1 January 2010 HMRC will treat this type of rent as certain. A new return is not required if the SDLT estimated in the earlier return was correct. Finance Act 2003 Sch17A Para 8 (1)(b) deals with cases where rents cease to be uncertain

Repayments of overpayments

It is likely that claims for SDLT repayment will be small for example we estimate that on an annual rent of one million pounds the repayment would be less than £250. We do not intend to make any repayments before January 2010 except where the lease ends before 31 December 2009.

If the fifth year of the lease ends before 31 December 2009, any claim for repayment of overpaid tax should be made within thirty days of the date when the rents for the first five years of the term become certain. Interest will be paid on repayments on the usual basis.

Making a claim for repayment

To make a claim you should write to: The Compliance Team, Birmingham Stamp Office, 9th Floor, City Centre House, 30 Unioin Street, Birmingham, B2 4AR. Letters should be headed ‘VAT on leases- overpayment claim’.

For more help with VAT why not get in touch and see how Davenports can help you.

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