I have a limited company client who has been served notice of termination of their lease by the landlord who wants to redevelop the property. The lease is written with the protection of the Landlord & Tenants Act and the lease has about 14 months to run. Statutory compensation at once times rateable value has been calculated at about £350,000 and they have been offered an additional £100,000 in recognition of the damage to their business. It suits the company to accept the notice but needs to know its tax position.
As I understand it the statutory compensation would be tax free if it was paid at the end of the lease for non-renewal but I'm not sure about during the term. Also what about the additional £100,000? The landlord want to charge Vat on the £100,000 but not on the statutory compensation - is this correct.
Any views would be appreciated.
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You need to work it through
The starting place is to determine whether any part of the receipt is capital in nature. Any capital part will not be business income, but may give rise to a chargeable gain, and any revenue part will be and will be taxable as such. See BIM40100 on.
My feeling is that the £100K disruption compensation is a taxable business receipt and the £350K statutory compensation is capital.
CG72300+ then deals with that aspect, and it may, as you say, be exempt. You'll also need to refer to CG72328+ though, CG72350 in particular.
There will only be VAT to the extent that the amounts being paid represent consideration for a supply. The statutory compensation has to be paid, irrespective of when notice is given, but the £100,000 might not be offered if notice were given so that the lease terminates at term.
It might, therefore, be seen as consideration for the supply by the company as tenant of the early surrender of the lease. However, the liability for that supply should be determined by reference to the tenant and not the landlord (who has presumably opted to tax?).
Assuming that the company uses the property for its own purposes has not opted, I'd say it was still an exempt supply. See VATLP02400. I'd have thought that the landlord would prefer not to have to charge VAT, because that will save them SDLT.
Those are just my views derived from HMRC commentary. Given the amounts, I'd certainly advise paid for second opinions on the separate CT and VAT issues.
