The woes of the Coronavirus pandemic have been well reported over recent months, but commercial landlords still need to give thought to how they might mitigate its impact. This includes ensuring they do not unwittingly fall into any VAT traps as a result of the negotiations entered into with tenants.
Coronavirus problems first started to be recognised as a major issue at about the same time the majority of landlords were issuing their March quarter rental demands. Although the Government has said landlords do not have to account for any VAT due up to the end of June until next March 2021, thus relieving pressure on cash flow, collection rates have slumped.
We know from speaking to our client’s collection of March quarter rents in the retail and hospitality sectors appears to have averaged about 30%, with offices at around 60%. The medical and, surprisingly, the education sector appear to be holding up quite well. We wait to see the results for the June quarter, but clearly these are likely to be far worse. The British Property Federation expects that retail landlords will receive only around a quarter of the £2.5bn June quarter rents due, as retailers take advantage of a temporary ban on evictions for non-payment of rent. Furthermore, the VAT deferral period ends on 30th June, and it is now fairly clear that this is unlikely to extended.
Landlords have been considering what steps they can take to help both their own and their tenants’ situation. A number have considered moving from accounting for VAT on the basis of invoices issued, to accounting for VAT only when rents are actually paid by their tenants. This is permissible, provided VAT invoices are not issued, and simple ‘requests for payment’ are made. In this way, landlords will not be accounting for VAT to HMRC until they themselves are paid, giving a considerable cash flow advantage, at a time when cash is king. There are a number of issues to be considered before moving to requests for payment, and it is certainly the case that IT systems will need to be tweaked to ensure the accounting is correctly dealt with. However, for landlords with a significant rent roll, where the VAT involved may be many millions of pounds, the exercise may however prove worthwhile.
Having issued rent invoices in March, a number of landlords may then have agreed with tenants to defer the collection of the rent due. Note that this is not an arrangement that allows the landlord to issue a credit note for the amount of rent and VAT deferred. A deferral arrangement is simply a commercial agreement between the landlord and the tenant to collect rent due at a later date. Since there has been no reduction in the rent, it is not correct to issue a credit note, and the full amount of VAT becomes due and payable at the date of the invoice.
Other steps that landlords have taken include negotiating changes to their existing lease arrangements with tenants. Revised lease terms might typically involve a lease extension at the end of the lease in exchange for a rent-free period during current Coronavirus times. The tenant may well pay the same amount of rent in total over the life of the lease, and therefore generally many will have ignored any consideration of VAT.
There may be other arrangements entered into where lease terms are amended, and which might not be thought of as giving rise to a supply for VAT purposes. Technically, however, these may amount to barter arrangements. In the past, HMRC has certainly suggested that a lease variation in return for a rent-free period could involve a barter which has VAT implications for both landlord and tenant.
It is unclear whether HMRC will take the point in coronavirus times, and possibly it will not. HMRC has just released an updated Building and Construction VAT Notice where they have asked landlords that may have made their accommodation, in this case, typically, student accommodation, available to NHS workers and other key worker staff to contact HMRC, as making such accommodation available to non-students can trigger a VAT charge. This does suggest that HMRC may be prepared to operate with a soft touch, but landlords entering into agreements with their tenants which involve amendments to lease terms should be careful not to trigger any VAT problems for themselves by trying to be helpful.
Government and Tax legislation, sourced from HMRC and gov.uk, is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice from their financial adviser before making financial decisions. Correct as at 22nd June 2020.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.