The rate of VAT returns to 17.5% on January 1, 2010. What VAT treatment applies to quarterly rental payments due on December 25? Where contracts are exchanged in 2009 to complete in 2010, and VAT becomes payable on the contract deposit, what VAT treatment applies at exchange and at completion?
December 25 rent payments
The tax point for standard-rated leases is the date the landlord issues a VAT invoice or receives payment of the rent, whichever happens first. Hence, on December 25, a tax point occurs, and VAT at 15% is due.
However, where a continuous supply (such as a lease) spans a change in the VAT rate, the landlord may, if it wishes, account for tax at the new higher rate on that part of the supply made after the rate change, even though the normal tax point occurred earlier. Hence, the landlord is able, but is not obliged, to charge VAT at 15% on rent up to and including December 31, and at 17.5% on rent in respect of the period from and including January 1. The same option applies where rent is payable in arrear. The landlord may account for tax at the old rate on that part of the supply made before the change, even though the tax point – i.e. payment of the rent – would occur after the rate change.
Contract deposits
Where VAT is payable on the sale of land, the basic tax point is the date of the completion. Where completion takes place in 2010, VAT at 17.5% should therefore be charged, even if contracts exchanged in 2009.
On some occasions, the tax point will be earlier. For example, an earlier tax point is created where a VAT invoice is issued before completion, or the seller receives all or part of the purchase price before completion. This would be the case where the contract deposit is paid to an agent instead of a stakeholder. In such a case, to the extent of the amount paid, a supply takes place at exchange, and the normal rule is that one should account for VAT on a deposit or prepayment at the rate in force when it is received.
Hence, 15% VAT should be payable on a 2009 deposit paid to an agent, but 17.5% VAT payable on the completion balance.
For more information on how the change in the VAT rate may affect you contact Steve Petty
Steven Petty, Commercial Property Solicitor
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