Given the tough economic conditions for commercial landlords it has come as no surprise to us that we have seen a marked increase in the volume and value of lease inducement payments. Like us, the Inland Revenue has also noticed this increase and recently signalled its intention to tax such payments.
Landlords often pay inducements to tenants to encourage them to sign up to long-term leases on commercial properties. These payments are typically calculated by reference to monthly rental and are often framed as equivalent to a "rent free period".
Up until now, lease inducement payments have not been expressly subject to tax in the hands of the tenant. One of the problems Inland Revenue seems to have had with the current position is that it does not always result in tax symmetry – while a lease inducement payment will generally be deductible to the landlord, it will not necessarily be taxable in the hands of the tenant.
While the enabling legislation is still being formulated, last week's media release from Inland Revenue indicated that, from 1 April 2013, lease inducement payments will be taxable. What remains unclear is the significance of the 1 April 2013 date and, in particular, whether this date represents the date the inducement payment was agreed or paid, the date the relevant lease documents have to be executed by or whether the lease must have actually commenced by this date.
The proposed law reform was initially to have had retrospective effect (from 26 July 2012). The 1 April 2013 date is welcome news for those tenants close to concluding leasing arrangements. While the position set out in Inland Revenue's media release may yet change, those due to receive or negotiate lease inducement payments would be well advised to execute and commence their lease arrangements, and receive the payments, well in advance of 1 April 2013.
We await the enabling legislation to provide greater clarity in this area.