HMRC guidance on the impact of the rise in VAT when calculating SDLT on leases
12 October 2010
The standard rate of VAT will increase from 17.5% to 20% on 4 January 2011 and HMRC has recently issued guidance on the impact on SDLT for leases where the landlord has opted to tax the premises. There may be an additional charge to SDLT in some circumstances. It is unfortunate that whilst the guidance states it applies to leases with an effective date on or after 27th July (the date of Royal Assent to the Finance Act 2010), the guidance did not appear until October. We understand HMRC are planning more guidance about returns submitted since 27 July which did not take the VAT increase into account. There may be more SDLT to pay on more leases as a result.
When calculating SDLT on a new lease VAT should be added at the rate of 17.5% to the rent payable before the first rent day falling after 04 January 2011 and added at 20% from that rent day for the rest of the term. So there is also an increase in SDLT on leases as a result of the VAT rate change.
Although not made explicit by the guidance, it follows that if claiming overlap relief on surrender and regrant (and in some cases on renewal of a lease) where SDLT was originally paid without taking the VAT rise into account, the tenant will pay 2.5% more SDLT on the regrant or renewal than it will get in relief. It seems this will also apply when SDLT has been paid because the tenant has been allowed into occupation under an agreement for lease. When the lease is subsequently completed SDLT will be calculated taking into account the VAT increase and credit will be given for the amount already paid on the agreement. So, in the absence of any indication from HMRC to the contrary, if completing a lease pursuant to an agreement entered before October upon which the tenant has already paid SDLT, it should expect to pay an additional SDLT charge on the lease.