Readers are probably aware that the rate of VAT will increase to 20% on 4 January 2011. Where a landlord has made a VAT election in respect of a tenanted commercial property, how should the landlord apply the change in rate to periodic rental payments made by the tenant?

Under a commercial lease, the tax point will be either the date on which the landlord issues a VAT invoice for the rent or the date on which the rent payment is received, whichever is the earlier. So, where a rent payment relates to a period of time which spans the change in rate (such as a quarter's rent due on 25 December 2010), the landlord would charge VAT at the then prevailing rate (ie, 17.5%) on the entire quarter's payment of rent.

Where rent is payable in arrears, the landlord has the option to treat the lease as a continuous supply. Under this approach, the landlord can charge VAT at 17.5% on the rent up to and including 3 January 2011 and then at 20% on the rent from 4 January onwards. Although the tenant pays a quarter's rent in a single payment, the payment is apportioned between the two rates of VAT.

On a related point, landlords holding a rent deposit should check whether the terms of the rent deposit deed require the tenant to top up the deposit when there is an increase in the rate of VAT. Unless a landlord obtains a top-up to the deposit, it will find itself out of pocket if it takes the deposit to cover unpaid rent because it will account to the Revenue for VAT at the higher rate. As the rate change approaches, landlords should consider negotiating deposits for new leases that are sufficient to cover VAT at 20% from the outset so as to avoid the need to obtain a top-up after 4 January.