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TaxationWeb by Burges Salmon LLP

The VAT treatment of landlord inducements to tenants entering leases, VAT and virtual assignments, and a SDLT problem with sales and leaseback arrangements involving nominees are all considered by Burges Salmon LLP.

1. VAT – Landlord inducements to tenants entering leases

HM Revenue & Customs ("HMRC") issued a Business Brief on 15 June 2005 providing revised guidance on the VAT status of inducement payments by landlords to tenants.

They had previously advised that a prospective tenant receiving an inducement payment would make a taxable supply by affording the landlord the advantage of being bound by the lease obligations the tenant had to fulfil. This meant that any such obligations, other than to pay the rent, would be sufficient to make the inducement payment consideration for a taxable supply.

HMRC now accept that lease obligations to which tenants are normally bound do not constitute supplies for which inducement payments on entering leases are consideration. There will be a taxable supply only where a payment is linked to benefits a tenant provides outside normal lease terms. HMRC gives the following examples of such taxable benefits:

• Carrying out building works to improve the property by undertaking necessary repairs or upgrading the property;

• Carrying out fitting-out or refurbishment works for which the landlord has responsibility and is paying the tenant to undertake; or

• Acting as anchor tenant.

Although this policy change may mean that tenants have wrongly declared output tax on inducements, HMRC have advised that there is no obligation to make a VAT adjustment. A tenant may however choose to do so subject to the three year capping provisions, but the implications as regards deductible input tax would also need to be reviewed.

2. VAT and Virtual Assignments – The Abbey National Case

The High Court has allowed Abbey National's (AN) appeal against the VAT Tribunal decision that a virtual assignment was not 'the leasing or letting of immovable property' and therefore not an exempt supply.

AN held a large number of freehold and leasehold properties. It sold some of these to an unconnected company (M) which leased them back to AN. However, for some short leases where landlord consent to the assignment could not be obtained AN entered into an agreement whereby it assigned to M the ‘economic benefits and burdens’ of the leases, but did not make any transfer of the actual land interest. AN remained in occupation of the premises, and paid a fee to M which was similar to the rent which would have been charged under a formal leaseback.

HM Revenue & Customs (HMRC) issued rulings that M was making a standard-rated supply of agency and property management services to AN, that rents payable to AN by sub-tenants remained the property of AN, and that when the sub-tenants made such payments to M, they were part of the consideration for standard-rated supplies of agency and property management services made by M to AN.

On appeal, the High Court accepted AN's contentions that firstly the supply which it received from M was an exempt supply of the ‘leasing or letting of immovable property’ and secondly that the supplies to the sub-tenants were made by M, rather than by AN. It held that a ‘letting’ could ‘include a situation where no right of occupation is in fact granted’.
This decision is good from a practical point of view. By treating virtual transactions in the same way as actual property transactions uncertainty and unexpected tax consequences are avoided. We will however have to wait and see whether HMRC will appeal the decision.

3. SDLT Sale and Leaseback – a problem with nominees

The new Finance (No 2) Act 2005 contains provisions that may make it harder to meet a Stamp Duty Land Tax exemption on sale and leaseback arrangements, and should be considered where a nominee is involved.

The leaseback element of a sale and leaseback arrangement is currently exempt from SDLT if it meets certain criteria, an important requirement being that the lease must be granted to the vendor. If A sells property to B and B leases it back, the leaseback must be to A and no-one else. This is already a possible pitfall with group companies.

The new provisions add the proviso that a leaseback to the vendor's nominee (rather than to the vendor itself) is effectively to be treated not as a lease to the vendor but to a third party, so the exemption would not apply.

August 2005

Burges Salmon

About Burges Salmon

Burges Salmon is one of the UK's leading commercial law firms. With some 550 partners and staff based in Bristol, and with a presence in London, the firm provides national and international organisations and individuals with a full service through the core practice areas of corporate, commercial, finance, litigation, property and tax.

Burges Salmon's Tax and Trusts department is one of the largest in the country. Its tax services are understood to be among the most comprehensive of any law firm in the UK.