Is compensation for surrender of a lease subject to VAT

Is compensation for surrender of a lease...

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My client is to receive compensation from a third party in consideration for the surrender of its lease and the cessation of its business. The head lessor is not related to the third party or to my client but will be offering a new lease to the third party upon surrender by my client. Is the compensation payment subject to VAT?

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chips_at_mattersey
By Les Howard
31st Jul 2014 16:27

Surrender of lease

The out-going tenant is, I think, making a supply to the third party in return for the payment. Therefore there is a supply, and the transaction falls within the scope of VAT.

In principle, since the supply relates to land, the supply will be VAT-exempt, unless the tenant has opted to tax.

Check HMRC guidance here: http://www.hmrc.gov.uk/manuals/vatlpmanual/VATLP02400.htm

But, do have a specialist look at the contract and correspondence between the out-going tenant and the third party to confirm either way.

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By shaun king
31st Jul 2014 19:11

Is it related to land?

Les

 

I agree your analysis on the two parties to the supply but I don't think it is land related. It is purely a payment by the third party to the tenant for them to surrender the lease and I would say it is taxable and not exempt subject to an option.

 

I agree that someone needs to look at the contracts.

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