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Negotiating Lease Concessions

Negotiating Lease Concessions

VAT treatment of lease concessions transactions and bartering


If your High Street wasn't having problems before, the catastrophic impact of Covid-19 on commercial occupiers, particularly those in the retail and leisure sectors, has led to many landlords and tenants agreeing deals to waive, vary existing lease terms or reduce rents in a way that would have been unimaginable months ago.


Proactive landlords have had to agree lease concessions to retain solvent tenants for example rent free periods, without receiving any direct benefit from the tenant to counter the concession.


Barter Transactions & Set Offs

In some cases, the parties will strike a deal where the liabilities and obligations under the lease are re-geared or restructured to provide different benefits for each party. As an example, an owner may agree to a reduction in the rent specified for a period in return for an occupier agreeing to remove a break clause in the lease, reducing the landlord's immediate income but giving them the benefit of a longer term without the risk of a break. These transactions are known as "barter transactions" for VAT purposes and can have VAT consequences even though no money changes hands. Each party can be treated as having made a VAT supply.


What is a Barter Transaction?

Recently HMRC published a note (Revenue and Customs Brief 11 (2020): VAT and Stamp Duty Land Tax when existing leases between landlords and tenants are varied) offering guidance on what types of lease variation HMRC may regard as barter transactions. The briefing note gives some general principles:

  1. If your tenant agrees no payment (or a token payment) in return for a concession granted by the landlord then there is no supply; but
  2. If your tenant agrees to something in exchange for the agreed concession which is beyond agreeing to accept the normal responsibilities of a tenant, such as paying rent, then it is possible your tenant is making a supply. Whether that supply is taxable or exempt depends on what the tenant agrees to do.


The HMRC briefing note does not offer clarity in all cases as it will not always be obvious whether what your tenant agrees to do goes beyond their normal responsibilities under the lease.


The guidance uses the possibly unusual example in the current climate of the tenant carrying out building work as an obligation that would go beyond the tenant's normal responsibilities under the lease. Other scenarios may be more difficult to determine whether a tenant's obligations go beyond their normal responsibilities or not or whether their value can be easily assessed.



Just because a transaction constitutes a barter transaction for VAT purposes, it does not mean that the landlord or tenant will necessarily pay VAT to the other. If both parties have opted to tax the premises then it will often be the case that each party's supply will be of equal value to the other and the parties will simply exchange VAT invoices for an equal amount.


However, many tenants do not routinely opt to tax their properties for VAT purposes and so may be more likely to make VAT exempt supplies in a barter scenario. The tenant would in this case have to account to the landlord for VAT on the landlord's supply, subject to the drafting of the transaction.


Landlords and their advisers should therefore make sure that the documentation allows them to demand VAT from their tenants in such circumstances and tenants should conversely be alert to unexpected VAT demands.