Tenants who sign leases with initial low rent periods and capital contributions may find themselves paying VAT on the value of the inducement.
In a decision on the Mirror Group v HM Customs & Excise, the High Court said that even incentives like rent reductions that did not supply any actual goods to the tenant would incur VAT.
The case had been referred to the High Court after the European Court decided in 2001 that VAT should be paid, but left the decision of whether it should be paid on the total £13m inducement package offered by Olympia & York (now Canary Wharf) to Mirror in 1993 to the UK courts.
Mirror’s lawyer, Lovells, had argued in the European Court that incentives made by O&Y to encourage the newspaper group to relocate to 1 Canada Square, including fit outs and other improvements, were VATable, but that rent reductions were not.
The High Court had been expected to send the case to the VAT & duties tribunal to decide whether incentives should be split into taxable and non-taxable categories.
But judges instead backed the European Court’s verdict and ordered Mirror to pay the remainder of the £2.275m VAT bill for the rent reductions.
Greg Sinfield, tax partner at Lovells, said: “Tenants will think twice before accepting incentives because they will not want to pay tax on things they cannot actually see and hold.
“It will push tenants towards rent-free periods rather than cash inducements.”
But Sinfield added that the ruling would be most significant to tenants accepting inducements from landlords who had not elected to waive VAT exemption, such as Canary Wharf and some institutional landowners in the City of London.
A leading tenant rep agent said: “Over the past year or two, landlords have offered massively increased incentive packages.
“This ruling could have huge implications.”
References: EGi News 24/02/2003
