Helping you prosper

Mitigating landlord property VAT costs during a downturn

17 September 2020

The COVID-19 lockdown has seen a decline in the use of commercial premises and tenants either unable to pay their rent or requesting rent free periods or time to pay.  Among the resulting cost of lost rent or cashflow for landlords there is an additional cost to manage – VAT.

If an invoice has been raised to the tenant the VAT charged must be accounted for.  Ironically, while the tenant may not be able to pay the rent charge, they may well recover the VAT, leaving them in a better position than the landlord.

There are steps to mitigate this cost:

  • if the tenant can recover the VAT charge, ask them to make payment of the VAT even if they cannot make payment of the principal sum
  • if there is an ongoing lease, you can normally issue a request for payment rather than a tax invoice – then issue the tax invoice on settlement.  This allows you to defer the tax point and account for VAT when you have received the funds
  • if you have issued a tax invoice then you must account for the VAT charged.  If this is unpaid after six months you can normally claim bad debt relief of this VAT.  The recipient of the charge must also adjust any recovery made at that time.  You must follow the record keeping requirements
  • if you cannot make payment to HMRC of VAT due then look to make a time to pay agreement with them.

You cannot merely issue a credit note if the tenant has refused to pay.  You can only do so If there has been a mistake or genuine overcharge.

If you agree to a rent free period this normally has no VAT consequences provided the tenant does not provide any consideration for taking the lease.  If you renegotiate a lease, you may need to take advice as variations can have VAT consequences that are often overlooked.  Some of these issues are set out in a Revenue & Customs Brief 11 (2020).

If you would like to discuss any of the above, please feel free to get in touch with me or, alternatively, contact your usual UHY adviser who will be pleased to help.