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Landlords, tenants and COVID-19 – VAT on barter transactions

Landlords choosing to help tenants manage their cashflow need to ensure the VAT effect is established in advance.

The Coronavirus pandemic has been a huge financial strain on many businesses. Whilst landlords have been prevented, by Government regulation, from enforcing the payment of rent from March 2020 until December 2020, the rent for these nine months remains payable.

Many tenants whose business has suffered have approached their landlords to discuss what they can afford to pay, and have asked for waiver of some rent, or revised payment terms from January 2021. Many landlords have been glad to enter into negotiations about varying the leases with their tenants, glad that the issue is being addressed, and that they are going to be able to collect some rent.

A secret to a successful negotiation is ‘give’ from both parties and, in exchange for a deferral, discount or even waiver of rent, landlords have been asking for an extension of a lease. This type of arrangement is known as a ‘barter transaction’ and there are VAT pitfalls that can trap landlords and tenants who do not take proper advice.

The majority of landlords ‘opt to tax’ their commercial property, so any property-related transaction entered into will be subject to VAT.

VAT implications of barter transactions

A barter transaction simply means a supply for ‘non-monetary consideration’, but even though no money is being exchanged the normal VAT rules apply, in both directions.

The VAT implications depend on the individual case but should be checked in advance by parties varying a lease to ensure there is no unforeseen loss or cashflow disadvantage, particularly where one party is unable to recover its input tax in full.

The majority of landlords ‘opt to tax’ their commercial property, so any property-related transaction entered into will be subject to VAT. Landlords should therefore raise an invoice, addressed to their tenant, for the value attributed to the supply they have made (waiver of rent, reduction of rent) plus VAT.

Most tenants do not ‘opt to tax’ their rented premises as this is not necessary if they only use the premises for their taxable business and do not sublet any element. The tenant’s property related supply to their landlord – for example agreeing to an extension of their lease – may therefore be exempt from VAT. The invoice the tenant would raise, for the agreed value, would therefore be for the value of the supply, with no VAT added.

The two invoices raised are not, therefore, equal. Any mismatch of this nature will lead to a cashflow disadvantage for the tenant, who will have to pay VAT for the ‘supply’ from their landlord. In addition the tenant may also find that raising an invoice for a supply that is exempt from VAT will have an impact on their ability to recover input tax (VAT paid on purchases) from other business activities.

There is considerable evolving caselaw and a distinct lack of clarity on what is and what is not, a property-related transaction. Therefore, if the input tax is significant, a tenant may wish to consider opting to tax the property before agreeing terms with their landlord to ensure that varying their lease brings the anticipated benefits – and no VAT liabilities.

Would you like to know more?

If you would like to discuss how this may affect you, please get in touch with your usual Blick Rothenberg contact or one of the partners to the right.

You can also visit our Property & Construction hub for more insights.