Rent, Licence Fees and VAT
Rent, rent review and rent free periods
Rent is usually the most significant sum paid by a tenant to a landlord. Rent is negotiated before the lease is granted and in longer leases is subject to review at regular (usually five yearly) intervals. The different types of rent review are discussed elsewhere in these information pages.
Rent is traditionally paid quarterly on the “usual quarter days”, which are 25 March, 24 June, 29 September and 25 December. However, it is also possible for rent to be paid monthly, or even weekly. Since the recession, it has become increasingly common for tenants to request monthly rent payments.
Sometimes landlords will offer a “rent free period” at the start of a lease to incentivise a tenant to take the lease. A rent free period enables a tenant to fit-out the premises before trading from them.
If premises are occupied under a licence rather than a lease, the licence may refer to “licence fees” instead of rent. Licence fees are more likely to be paid monthly or weekly than quarterly.
Is VAT chargeable on rent and licence fees?
Commercial property is exempt from VAT but landlords and licensors can exercise the “option to tax”. This is also known as “waiving the exemption” and is done by sending a written notice of the VAT election to HM Revenue & Customs.
If a landlord (or licensor) has waived the VAT exemption, then he must charge VAT on rent and certain other payments made under the lease or licence. Tenants should ask for evidence that a VAT election has been made before paying any VAT. Tenants should also ask for a VAT invoice for their own VAT accounting purposes.
Landlords and tenants should be aware of two important exceptions to the rule that commercial property is exempt from VAT. Premises used for self storage attract VAT at the standard rate (currently 20%) even if the Landlord has not made a VAT election. Garages or facilities specially designed for parking are also standard-rated.
VAT is a complex area and specialist advice should be sought from an appropriately qualified professional.