VAT Opt to tax on surrender of a lease

A client has recently purchased a commercial property with an existing tenant. The vendor had not opted to tax and so the sale was exempt from VAT. The client intends to extensively refurbish the building and so has opted to tax his interest in the property. I have just discovered that he has agreed to accept the surrender of the lease from the tenant for a payment of £200,000. What are the VAT implications of this payment?

The supply by a landlord of accepting the surrender of a lease upon payment from a tenant is known as a reverse surrender and is seen as a grant of an interest in, or right over, land (VAT Act 1994 Schedule 9 Group 1 Note 1). Such a supply is exempt from VAT unless the person making the supply has opted to tax the property in which case it is standard rated.

In this client’s case therefore, it depends on whether the payment for the reverse surrender was received before or after the option to tax was put in place as this will determine whether it is an exempt or a standard rated supply. If the payment was received before the client opted to tax the payment is exempt from VAT but if the payment was received after they had opted to tax it is standard rated.


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