The amount of Stamp Duty Land Tax (SDLT) payable on the grant of a non-residential lease is based on the net present value (NPV) of rent.  NPV is calculated on the rent payable over the entire term of the lease and any standard rate VAT due on that rent. 

How does the increase in the standard rate of VAT (from 17.5% to 20% on 4 January 2011) influence SDLT payable on new and existing leases?

Here are three points to note from recent guidance issued by HM Revenue & Customs: 

A.  New NPV calculations must include the VAT increase

The NPV for a lease granted on or after 27 July 2010 should take account of the January increase to standard rate VAT.  The NPV calculated will therefore include VAT at 17.5% for rent due on the September and December 2010 quarter days but VAT at 20% thereafter.

B.  Revised NPV calculations must include the VAT increase

If the rent payable under a lease is variable or uncertain (perhaps due to a rent review provision) the NPV must be calculated by making a reasonable estimate of the rent for the first 5 years of the term.  A further NPV calculation will then be necessary when the rent is ascertained (or at the end of the fifth year of the term).  This revised calculation must also take into account VAT at 20% on rent falling due from 4 January 2011.

C.  The VAT increase will not impact on SDLT returns made for leases granted prior to 27 July 2010

A further SDLT return will not be necessary for leases granted after 4 January 2006 but before 27 July 2010 solely because of the increased rate of VAT.  It is deemed that the rate change does not in itself cause the rent to be varied and a revised NPV calculation and SDLT return will not be required.  Similarly, the Landlord making an option to tax after the grant of a lease will make VAT payable on the rent but the NPV calculation will not need to be reviewed.

If you would like to talk to someone about VAT, NPV and SDLT, please contact Ben Lamb, commercial property solicitor on 0113 227 0383 or at ben.lamb@gordonsllp.com.