In the current economic climate, the preservation and maximisation of rental income continues to be crucial as capital values of investment properties achieve slow growth.

Under the Goods and Services Tax (Jersey) Law 2007, a landlord of commercial property in Jersey may be liable to account to the States of Jersey for 5% of its rental income. Therefore, it is the landlord (as supplier) and not the tenant (as recipient) that is liable to pay this tax. If a lease does not oblige the tenant to pay the landlord rent plus the goods and services tax, the landlord will lose 5% of its rental income, as it must pay the States of Jersey its 5% liability out of its rental income without being able to recover the additional 5% from its tenant. In such cases the landlord will retain only 95% of its rental income.

However, commercial leases entered into before the law was published have been grandfathered. Therefore, for leases entered into before August 17 2007, supplies under the lease will not incur a goods and services tax liability for a period of five years from that date (ie, until August 16 2012) or until the lease is varied, whichever is the earlier. Consequently, rental income received under a lease entered into before August 17 2007 will not be subject to goods and services tax liability until August 16 2012 (unless the lease has been varied before that date). However, after August 16 2012, all commercial leases will potentially become taxable supplies, thus attracting a 5% liability irrespective of whether the landlord can recover the additional 5% from its tenant.

Therefore, ahead of August 16 2012, landlords responsible for commercial property leases that commenced before August 17 2007 should endeavour to ensure that their leases are structured correctly in terms of goods and services tax recovery provisions. If commercial leases are not structured correctly following August 16 2012, landlords may lose 5% of their rental income as well as suffering a reduction in the investment value of the property itself as a consequence.

For further information on this topic please contact Jonathan Hughes at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected]).