Retail surgery: How will the forthcoming VAT increase affect my rent, specifically the Stamp Duty Land Tax liability on my shop leases?

Any lease entered into since the Budget that extends beyond January 4, 2011, where the landlord charges VAT on the rent (as many do), will have had its Stamp Duty Land Tax (SDLT) liability calculated on the basis that VAT will be paid at the new, higher rate from that date. SDLT is charged on the VAT inclusive figure.

Peter Busby, partner at law firm Thomas Eggar, explains: “The legislation also provides that, if there is any change in the rent in the first five years, a new SDLT calculation has to be made, and a return filed, with any extra tax to be paid within 30 days of the change.”

There were concerns this would affect leases entered into pre-budget because VAT rises effectively increased the rent, but an HMRC u-turn means it is not relevant.

However, the general rule still applies. Busby says: “If there is a rent review within the first five years, or, as may be more relevant with retail leases, a turnover rent, then every time the rent changes a return has to be filed and appropriate tax paid.” At that time, the VAT element included in calculations must be worked out at the then current rate of VAT after January 3.

Busby adds there is no longer any need to review leases granted since January 3, 2006, purely on the basis of the VAT change, but, “on pain of penalties, any changes in rent in the first five years of the term do trigger a re-calculation of SDLT liability in which current rate of VAT must be taken into account”.