For a number of reasons, it may be necessary for a tenant to surrender its leasehold interest in a property to the landlord (this equally applies to a subtenant surrendering a sublease to a leasehold landlord). In the vast majority of cases, there is no money changing hands, so there are no immediate VAT implications. However, there are occasions where the landlord wants the tenant to leave the property early, and is willing to pay the tenant to make the surrender (perhaps to sell the property or put in a preferred tenant).
In these circumstances, the payment for the surrender of the lease to the landlord is an exempt supply by the tenant, but where the tenant has opted to tax its interest in the property, the payment from the landlord becomes standard-rated.
As we have said, there are several reasons why a tenant might surrender its lease to the landlord. In this scenario, the tenant is looking to get out of the property early (perhaps to move into a preferred property), and is willing to pay the landlord to accept the surrender.
The payment for the surrender of the lease is an exempt supply by the landlord, but where the landlord has opted to tax its interest in the property, the payment from the tenant becomes standard-rated.
Here the tenant has been approached by a third party willing to take over the remaining tenancy by assignment of the lease. As with surrenders, most cases will not involve money changing hands, so there are no immediate VAT implications. However, there are instances where the third party is willing to pay the tenant for the assignment.
The payment for the assignment of the lease is an exempt supply by the tenant, but where it has opted to tax its interest in the property, the payment from the third party becomes standard-rated.
In this scenario, the tenant has again found a third party to assign the lease to, but is having to pay the third party to do so.
The supply is made by the third party to the tenant, but as the third party has no legal interest in the property, the land exemption is not available. As such, the payment received from the tenant is standard-rated.
Reverse Premiums (Inducements)
This final scenario is where the landlord has found a third party willing to enter into a lease for the property, and is paying the third party to do so.
Unlike with reverse assignments, the third party is not making any supply. The payment received from the landlord is outside the scope of VAT, unless the third party provides a benefit over and above that of entering the lease.
The key issues to consider are whether the party receiving the payment has an interest in the property, and whether that interest has been opted to tax or not.
By Steve Allen