Is VAT due on sub-lease.

A person I know has recently retired and closed his business. The business was run from a premises for which he has a long term lease at less than current market rate - c.20 years remaining. The lease allows him to sub-let or sell his interest and his landlord is happy to let him do either.

He has been approached by someone who wants to rent the premises at current market rate for an initial period of 3 years, and possibly longer - this other persons business wants to set up a branch at his premises.

Will VAT be due on the creation of the sub-lease of 3 years? - I understand that VAT is due on leases of less than 10 years? The other piece of information that may or may not be relevant is that the person was a sole trader, so possible sub-lease will be from an individual rather than a company.

The alternative choice this person has is simply to put the lease on the open market, but his preference is for a regular income in retirement rather than lump sum.

The answer is: it depends.

VAT on property is a very technical area. Leases of less than 10 years are not normally subject to VAT and so the creation of such a lease can result in a VAT clawback for the landlord. If this is the case, it may be an option for the landlord to elect to subject this lease (and all his short term commerical leases) to VAT at 21% on the rental income.

He really needs to discuss the VAT history of this lease with his accountant to determine whether or not he should elect to tax his short term lettings.

There are a number of questions areas you have to think about when trying to determine whether or not a VAT liability arises in relation to a lease.

Starting right at the basics:

1) Has the property been developed (Section 1 VAT ACt) since 1 November 1972?
2) Is the lease c.20 remaining subject to VAT?
3) How long was the lease when orginially obtained?

Nige is quite correct in what he has said in relation to short term leases. VAT on property is a complete mind field, even for professionals. Law is changing is relation to it for 1 July 2008.

Can I suggest that you might create a license rather than a sub-lease? It may prove easier for both parties.

There are many different situations, once you have answered the above I will try and give you greater detail.