The rate of VAT is due to increase to 20% on 4 January 2011. This note is a reminder of how landlords of commercial property should implement that VAT increase on rental payments for periods spanning that date.
Rent paid in advance
- If a landlord issues a VAT invoice for the period spanning the rate change before 4 January 2011, then the correct VAT rate is 17.5% on the rent for the entire period, even though the tenant may not pay until after that date.
- If the tenant pays the rent for the period spanning the rate change in cleared funds before 4 January 2011, then the correct VAT rate is 17.5% on the rent for the entire period.
- If a landlord usually only issues rent demands (with a VAT invoice to follow on receipt of payment) but the tenant does not pay the rent for the period spanning the rate change until on or after 4 January 2011, then the correct VAT rate is 20% on the rent for the entire period.
NB – we recommend that landlords who issue rent demands (but not VAT invoices) in advance make clear to their tenant that the rate of VAT depends on when they pay. We suggest including the following wording on the rent demand:
“Please note that the rate of VAT is increasing to 20% on 4 January 2011. If you make the payment in cleared funds before that date then the amount due will be as shown on this rent demand. If you fail to make payment until on or after that date then the amount due will be increased to reflect the change in the rate of VAT from 17.5% to 20% for the entire period.”
- HMRC have put in place complicated anti-forestalling measures which may prevent tenants taking unfair advantage of the lower rate of VAT on a pre-payment of rent. Landlords should take specific advice on rent paid in advance of the VAT increase if the tenant cannot recover the VAT charged in full and either (a) the landlord and tenant are connected parties, or (b) the prepayment is for a period longer than a year, or (c) the prepayment is for a period longer than the tenant would usually request.
Rent paid in arrears
- The landlord should apply the VAT rate in force when the rent is paid or invoiced. VAT will be charged at the rate of 20% on the rent due for the entire period spanning the rate change. This means, for example, that the December 2010 – March 2011 quarter rent invoiced in arrears in March 2011 will be subject to VAT at 20% in full.
- Alternatively the landlord can choose to apportion the rent involved and charge VAT at 17.5% on the part of the rent that relates to the period to 3 January 2011, and VAT at 20% on the remaining part.
These special rules apportioning the rent due under the lease are optional so landlords do not have to apply them. Given the extra administration involved in carrying out the apportionment, landlords may only want to consider these optional rules for tenants who cannot recover the VAT charged on their rent.
Annual VAT invoices of rent
- Some landlords issue single VAT invoices for rents due up to a year in advance. The VAT legislation contains special rules allowing landlords to defer accounting for VAT on such invoices until the earlier of a payment falling due or receipt.
Landlords who issue such annual VAT invoices should note that these invoices will cease to be valid for any payments due after the rate change on 4 January 2011. Landlords should issue tenants with replacement VAT invoices for payments due on or after 4 January 2011 showing the 20% VAT rate.