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Stamp Duty Land Tax and the rate of VAT – do you owe more tax?

Napthens - December 12th 2010

On the 4th of January 2011 the standard rate of VAT will increase from 17.5% to 20%. HM Revenue & Customs have issued guidance on the impact of this increase on Stamp Duty Land Tax (“SDLT”) on non-residential leases. 

The purpose of this update is to summarise the main points and also to raise awareness of the SDLT obligations and potential benefits where there is a reduction in rent.

The amount of SDLT chargeable on a lease of non-residential property is based on what is known as the net present value of the rent (“NPV”). The NPV is based on the rent payable over the entire term and includes any VAT which is due on that rent. At current rates, SDLT becomes payable for non residential leases where the NPV is £150,000 or over.

It should be noted that where the rent is variable and uncertain, for example where there is a rent review during the term, the NPV must still be calculated for the whole term. This is done by estimating the rent payable for each of the first five years of the term. The highest annual rent payable, or estimated, for any of those first five years is to be taken as the annual rent for each year of the rest of the term. 

In addition to filing an SDLT Return and paying any SDLT due following completion of the lease, there is also a requirement to review the NPV calculation. This tax review is usually undertaken at the end of the fifth year of the lease or, if earlier, the date when the rent payable for the first five years can be ascertained, for example following the determination of the rent after a rent review. If, after carrying out the review, the SDLT liability is greater than the amount that had been paid on completion of the lease, then a revised SDLT Return should be made and balance of any additional SDLT should be paid. There are strict timescales for filing the revised SDLT Return and paying any balance due.

For leases granted on or after the 27th of July 2010, the NPV for a VAT lease should take account of the increase in the standard rate of VAT. On that basis, the NPV calculation will include:-

  • VAT at 17.5% for rents due prior to the 4th January 2011; and
  • VAT at 20% for rents due after the 4th January 2011.

For leases granted after 4th January 2006 but before 27th July 2010 a further SDLT Return is not necessary unless the rents payable under the lease are variable or uncertain. Where this is the case, a further SDLT Return will be necessary when the rents are ascertained and the new NPV calculation should be taken on account of the increased rate of VAT.

It should be noted that where, on review, the NPV calculation is reduced, for example where a tenant benefits from a reduction in rent, there can be an obligation on the tenant to notify HM Revenue & Customs of this and there may in certain circumstances be the possibility of obtaining an SDLT refund, although each case would have to be examined on its own merits.