Have you entered into a lease that spans 4 January 2011 and which has not passed the end of the first five years of its term? Or are you about to file a land transaction return and pay stamp duty land tax (SDLT) for a lease spanning the 4 January 2011 VAT rate rise?

If you answered yes to either of these questions, then the guidance that HM Revenue & Customs (HMRC) published yesterday will be helpful.

The rate of VAT is increasing on 4 January 2011 from 17.5% to 20%. There are two SDLT issues that are triggered by the VAT rate change:

  1. Does the VAT rate change require you to revisit land transaction returns which have already been filed?

Answer: HMRC has stated that if you filed a land transaction return and paid SDLT before 27 July 2010 then you do not need to revisit that return solely because of the VAT rate change. However, if your rent is uncertain or variable for other reasons, then you will need to take account of the VAT rate change when you revisit that return.

HMRC's guidance suggests that for leases entered into after 27 July 2010, the VAT rate change should be taken into account for the purposes of calculating the SDLT due. If you have filed a land transaction return on a different basis then you should seek further advice as it may be that your land transaction return needs to be amended and further SDLT may be due.

  1. What should you do for land transactions in respect of which you have not yet filed a land transaction return?

Answer: Tenants that have not yet filed a land transaction return in respect of a lease spanning 4 January 2011 should calculate any SDLT liability using the VAT rate applicable at each rent payment date.

The answers to these questions are dealt with in more detail below.

  1.  Does the VAT rate change require you to revisit land transaction returns which have already been filed?

HMRC's guidance states that a further land transaction return will not be required solely because the VAT rate has changed.

However, leases that have a variable or uncertain rent (such as a turnover lease) will remain subject to the normal rules. In these circumstances, the tenant will be obliged to review the lease (taking into account the impact of the VAT rate increase for those rent payment dates falling on or after 4 January 2011) at the end of the first five years of the term of the lease and determine whether any additional SDLT is due.

If you have filed a land transaction return for a lease entered into on or after 27 July 2010, then HMRC's guidance suggests that the VAT rate change should have been taken into account when calculating the SDLT payable under that lease. If you have filed a return for such a lease on a different basis then you should seek further advice as it may be that your land transaction return needs to be amended and further SDLT may be due.

  1.  What should you do for land transactions in respect of which you have not yet filed a land transaction return?

Tenants that have entered into leases on or after 27 July 2010 or are about to enter into a lease spanning 4 January 2011 should calculate any SDLT liability using the VAT rate applicable at each rent payment date.

So, any rent payable on a rent payment date before 4 January 2011 will be subject to VAT at 17.5% and any rent payable on or after 4 January 2011 will be subject to VAT at 20%. In practice, this is likely to mean that payments for the December quarter day (or earlier) will be subject to VAT at the current rate and any payments for the March quarter day or later will be at the higher 20% rate.

Questions?

If you have any questions about how the VAT rate change or HMRC's guidance may affect a transaction you are contemplating or have recently completed, please contact the authors or your usual Herbert Smith contact.

A link to the HMRC website can be found here.