The rate of VAT increased on 4 January 2011 from 17.5% to 20%. Several clients have asked us to comment upon how the parties to a lease of a property where the election to waive the VAT exemption has been made should apply the change in the rate of VAT to rents and other sums due in respect of periods which straddle the VAT rate change.

Under most commercial leases rent will have fallen due on the December quarter day, i.e. 25 December 2010. As always it is the tax point which will determine the rate of VAT payable. The tax point in relation to a commercial lease will be the date upon which the landlord issues the VAT invoice for the rent due or the date upon which the payment is received from the tenant whichever first occurs. Therefore a landlord issuing a demand prior to 4 January 2011 for the December quarter’s rent should have applied VAT at the rate of 17.5%. Similarly, a tenant which made a payment prior to 4 January 2011 in respect of the December quarter’s rent should have paid VAT at the rate of 17.5%.

Where a landlord has delayed invoicing the December quarter’s rent to a date beyond 4 January 2011 or where, in the absence of a demand issued prior to 4 January 2011, a tenant pays the December quarter’s rent after 4 January 2010, VAT must be charged and paid at 20%.

The one exception to this will apply in the relatively rare cases where rent is due in arrears and in these cases VAT can be charged at 17.5% for any period prior to 4 January 2011and at the higher rate for the period after that date.

Consequently a landlord who has made a VAT election in respect of a property but whose tenants are not VAT registered who has invoiced the December quarter’s rent prior to 4 January 2011 will have saved its tenants 2.5% VAT.

As a general reminder rent is almost always due on the dates set out in the lease whether or not a formal demand has been received from the landlord and any tenant would be unwise to defer payment until it receives a demand. Indeed, most leases will also provide for interest at a rate of at least 3% over a base rate on late payments of rent irrespective of demand.

A word of warning however: provisions were included in the Coalitions Emergency Budget to address the artificial creation of tax points prior to 4 January 2011 so as to save the 2.5% increase. These provisions could mean a supplementary 2.5% levy by the HMRC where certain criteria are met and could be applied, for example, in circumstances where artificial tax points have been created in an attempt to save the additional VAT i.e. where the landlord and tenant are connected; where the pre-payment is more than £100k (unless on normal commercial terms) and where the payment is not due within 6 months.

Elizabeth Ruff is a Partner in the real estate department and can be contacted for more information on this feature at

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