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Commercial Leases - VAT & RCT considerations for tenants

Rents – to opt or not to opt

Lettings are exempt from VAT. The landlord can however choose to tax the rents payable under the lease. This option must be made in writing, either by including a provision in the lease agreement or by issuing the tenant with a document confirming that VAT is chargeable on the rents.

In certain circumstances where the tenant has little or no VAT recoverability, it may be possible to agree with the landlord not to opt to tax the rents. This may be possible where the irrecoverable VAT lost on the rents for the tenant would be far greater than any VAT potentially clawed back from the landlord.

This will inevitably result in a higher rent, but even so, this may be less than the cost of the VAT which would have been charged on the rents.

When taking out a new lease there are often other charges included in the lease outside of the main rent which need to be considered from a VAT & RCT perspective.

Insurance rent

This is essentially the tenant’s contribution towards the landlords cost of insuring the property. This is not a supply of insurance services to the tenant.

Any contribution made by the tenant towards the landlord's cost of insuring the let premises should be treated as part of the consideration for the rent.

Consequently in relation to an opted lease, this should be taxed in the same way as the rents payable under the lease, i.e. if the landlord has opted to tax the rents, then the insurance rent will also be liable to VAT at the standard rate.

Service Charges

Service charges may include, cleaning, insurance, security, heating and maintenance, etc.

Supplied by the landlord or the landlord’s own staff

According to Revenue guidance, where these services are supplied using the landlords own staff, then this is a separate taxable supply, taxable at the appropriate VAT rate in the hands of the landlord.

Landlord buys in services on behalf of the tenant

Alternatively, where the landlord buys in services and recharges them to tenants Revenue allow a concession whereby the VAT charged to the landlords is allowed to pass through to the tenants.

The landlord should issue to each tenant, once a year, an invoice showing VAT charged to the tenant on these services. The tenant can reclaim VAT based on this invoice. The VAT return for the landlord should be VAT neutral.

Tenant covenants to carry out landlords Category ‘A’ works

Where the lease agreement includes a building covenant whereby the tenant agrees to undertake any fitout works for the landlord/developer then the tenant will, in respect of its own contract with its builder be a Principal Contractor in respect of the fit out works for RCT purposes.

Section 530A(1)a of the TCA 1997, states that a person who, in respect of the whole or any part of the relevant operations to which the contract relates, is the contractor under another relevant contract, is a Principal contractor for RCT purposes.

The landlord may also be obliged to operate RCT on the payment being made to the Tenant if they are themselves a principal for RCT purposes.

This common feature of leases in newly developed buildings is something which can unexpectedly catch both the landlord/developer and the tenant from an RCT perspective.

The ‘own use’ exemption provided for in Section 530A(2) states that a builder or land developer is not to be treated as a principal by reason only of the fact that he or she erects a building or develops land in relation to such a building, where the building is for his or her own use or occupation or the use or occupation of his or her employees.

In this case the tenant will be a Principal contractor due to its agreement to carry out Category ‘A’ works for the landlord. Therefore the exclusion outlined will not apply in respect of the tenant’s own works, where those works are considered to be ‘construction operations’ from an RCT perspective.

What is the difference between Landlord fit-out and Tenant fit-out works?

Landlord fit-out – level of fit out generally completed by the developer and may include

  • Raised floors and suspended ceilings (with a basic finish) 
  • Basic mechanical and electrical services 
  • Fire detection services and smoke alarms 
  • Air-conditioning and ventilation 
  • Basic internal finishes

Tenant fit-out – completes the fit out of the internal space to the tenants requirements and may include

  • Fully-fitted kitchens and non-communal office amenities 
  • Partitioning; including meeting rooms, offices and breakout spaces 
  • Workstations and furniture 
  • Re-routing air-conditioning and power points
  • IT installation and infrastructure
  • Design and brand detailing

Surrenders/break clauses

When signing up to a lease, the surrender/break clauses should also be reviewed to ensure that there are no VAT liabilities unduly being imposed on the tenant. 

While these are only some of the areas of note in a commercial lease, we would recommend that all commercial lease agreements are reviewed from a tax perspective to ensure that there are no potential VAT/RCT issues which may arise.

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