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Oct

SDLT and the art of double taxation PUBLISHED IN VAT

It is well known, and much resented, that Stamp Duty Land Tax (SDLT) is calculated on premiums or rent inclusive of any VAT that may be added irrespective of whether the purchaser or tenant can reclaim any of that VAT. The effect, where VAT is chargeable on either premiums or rent, is to levy SDLT at a higher effective percentage than the underlying cost to the tenant. The obvious unfairness of this is borne out by the fact that VAT is intended not to “stick” with suppliers in a supply chain, but to be relieved until the final supply transaction through the ability to reclaim input tax. However, a tax which is increased by reference to the input tax that is claimed does not work in such a neutral fashion, and thus distorts the VAT system itself.

 

The keen sense of injustice created by this general situation may be sharpened somewhat by the announcement on 11 October 2010 of the way in which the increase in the standard rate of VAT will impact on SDLT in regard to rental leases.
 
Rental leases issued on or after 27 July 2010 must have been issued in the knowledge that the VAT rate would increase to 20% on 4 January 2011. Accordingly, the future VAT inclusive rents applicable under the lease could be calculated taking into account the increase in the VAT rate. This means that the SDLT calculation will inevitably be higher unless the lease is extremely short.
 
It is worth bearing in mind, of course, that the timing of quarterly rent payments will have an impact on the effective date at which the higher rate of VAT will apply to any given rent charge. It would not be right simply to time apportion the lease using 4 January 2011 as the date of the switch, since any invoice issued under normal tax point rules prior to 4 January 2011 would be likely to enjoy the 17.5% rate of VAT until the first invoice or payment following after 4 January 2011, and this means that the 17.5% rate is preserved in economic terms for the full first quarter of 2011. But that is a mere quibble, because the effective rate of SDLT will have nonetheless increased on such leases. 
 
And, if you were fortunate enough to enter into your lease prior to 27 July 2010 then you could not have known, (notwithstanding a strong ability to guess, particularly by reference to the Bill which was introducing the measure) that the VAT rate was going to increase. The rules allow you to value your prospective rent as at the time that the lease is issued, and not to crystal ball gaze about potential VAT rate increases. 
 
Furthermore, so the guidance tells us, one would not expect to have to take into account the increase in the rate of VAT on the basis of any ”abnormal” increase in rent arising at the five year break. The rules for SDLT, of course, allow for further SDLT to be paid if there is an abnormal level of increase at the break, but if no such increase occurs, the SDLT is not adjusted from the original declaration. However, in determining what is an abnormal increase, any increase in the rate of VAT can apparently be ignored, and this means that for most circumstances the increase in the rate of VAT will have no impact. But that is not so in cases where the underlying net rent increases abnormally under this rule. HMRC confirms that in that particular instance any recalculation that is required of the value of the rent arising after the break will have to include VAT at the new rate. So, if one has entered into a lease which is subject to this exceptional revaluation, and even though the lease is entered into before 27 July 2010, the higher rate of VAT bites on the post break SDLT calculation after all. 
 
This creates an unlevel playing field as between leases which did not trigger that recalculation mechanism, and those that did. It is double taxation, with an extra dollop of further taxation for some unfortunate lessees.
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