Landlord and tenant ― general principles

By Tolley

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Landlord and tenant ― general principles
  • Inducements or incentive payments between landlords and tenants
  • Rent free periods
  • Surrendering a lease
  • Variations to leases
  • Restrictive covenants
  • Statutory payments
  • Indemnity payments
  • Rent adjustments
  • Dilapidation payments
  • Recovery of rent from third parties

This guidance note provides an overview of the VAT treatment of property rental transactions. Please see the Landlord and tenant – service charges guidance note for further details on the VAT treatment of service charges.

De Voil Indirect Tax Service V4.111 (subscription sensitive); HMRC Notice 742 

An overview of the interaction of the various taxes when properties leases are assigned or surrendered is provided in ‘Tax Treatment of Leases’ by Jane Feeney in Tax Journal, Issue 900, 13 (10 September 2007) (subscription sensitive).

Inducements or incentive payments between landlords and tenants

HMRC announced in Business Brief 12/05 that, following detailed discussions with representations from various bodies it has accepted that lease obligations, to which tenants are normally bound, do not constitute supplies for which inducement payments on entering leases are considered. As a result, HMRC believes that the majority of these types of inducements should now be outside the scope of VAT, being no more than inducements to tenants to take leases and to observe the obligations in them. However there will still be a taxable supply where a payment is linked to benefits a tenant provides that are outside the normal terms of the lease. This change of policy effectively puts inducement payments on a similar VAT footing to rent free periods (see below) in being mainly outside the scope of VAT and only a taxable consideration where directly linked to a specific benefit supplied by a tenant to a landlord. This follows the CJEU ruling in Mirror Group Case C-409/98 (subscription sensitive).


See ‘Of Mirrors and Anchors’ by Martin Scammell in Tax Journal, Issue 798, 9 (18 July 2005) and Issue 799, 12 (25 July 2005) (both subscription sensitive).

Examples of situations where the tenant may be making a supply to the landlord in exchange for the inducement include:

    More on Supplies of land and property: