“Opting to Tax” – Top 5 Considerations for all Business Tenants
by Sally Hutchings
It is important that tenants thinking of taking a lease of a commercial property investigate the VAT status of the property at an early stage. If VAT is payable on the rents and/or premium, there could be significant financial implications which may not have been factored into the budget.
Generally, commercial property is exempt from VAT but this is not always the case. For example, a commercial property less than three years old is standard rated (20%) when sold. A commercial property owner can also elect to waive the exemption from VAT and, instead, opt to charge VAT on their property. This is often referred to as “the option to tax”. A commercial property owner may opt to tax for a number of reasons. One example is so that they can recover input VAT on any repairs or construction costs.
Once an option to tax has been made, there are very limited circumstances in which it can be reversed. Therefore, tenants taking a lease of a property on which the option to tax has been exercised should keep in mind the following five implications:
1. Once the option to tax is exercised, VAT must be charged on any letting (subject to a few exemptions). Therefore, it is important for tenants to take accountant’s advice early on to ascertain whether the VAT paid can be recovered. Some businesses can recover very little or none of the VAT. For example, businesses in the insurance, finance or education sectors are unlikely to recover any VAT at all. Tenants that are unable to recover VAT may consider negotiating a lower rent to take this extra cost into consideration.
2. Stamp Duty Land Tax (SDLT) is payable on the VAT inclusive rent. Therefore, VAT opted properties can increase the tax liability on the rent and/or premium significantly.
3. If the option to tax is exercised, it may be more difficult to transfer the lease of the property as VAT sensitive buyers that cannot recover VAT may be put off.
4. If potential purchasers can recover VAT, then VAT is less likely to be an issue. The tenant/purchaser may recover the VAT paid as input VAT and the requirement to pay VAT will be a matter of cash flow only.
5. Retrospective options to tax are not permitted so any rent or other sums that have already been paid when the option to tax is exercised, including service charge, will remain exempt, even if they relate to a period after the option.
To discuss any of your commercial property requirements, please contact the Commercial Property Team on 020 8943 1441. For more information on Commercial Property please visit our website https://www.morrlaw.com/commercial-property-2/
Revised Corporate Transparency Rules
Companies (and LLPs) have various obligations in respect of corporate transparency under UK legislation. Requirements were introduced last year to hold information on people with significant influence or control (PSCs) by maintaining a register (PSC Register). We wrote about this back in September’s corporate insights blog (click here to view).
New regulations extending these obligations were introduced on 26 June via the ‘Information about People with Significant Control (Amendment) Regulations 2017’. We have summarised the two new requirements below.
1. All companies and LLPs are now required to give notice to Companies House of changes to the PSC Register more frequently.
Up until now, the requirement was to submit ownership information (including changes to PSCs) to Companies House annually with its confirmation statement.
In order to ensure that information is ‘adequate, accurate and current’, companies and LLPs are now obliged to record any PSC changes on its Register within 14 days of obtaining the information. Companies must then file this new information at Companies House within a further 14 days. Effectively, a Company has 28 days to notify Companies House of PSC changes.
Compliance with this new requirement is important as failure to do so may attract criminal penalties.
2. The regulations widen the scope of companies required to comply with the relevant corporate transparency provisions under company law.
Both unregistered companies and listed companies on secondary markets (e.g. AIM) come into the scope of the corporate transparency obligations for the first time. They will be subject to the same obligations to obtain and file information on people with significant influence and control.
The regulations provide for a four week transitional period ending on 24 July 2017 so that these companies can investigate their ownership accordingly.
As we reported back in January (https://www.morrlaw.com/legal-developments-affecting-your-business-in-2017/ ), the European Commission has published proposals to extend corporate transparency obligations even further to include widening the scope of the trust register and reducing the threshold indicating ownership and control to 10% in certain circumstances. We will keep you informed about any further developments as and when they arise.
Just a bit of friendly advice
by Kellie Williams-Jauvel
Being asked for informal advice by a family member or friend (or as a favour to a long term client) is a common occurrence for most professionals. Providing some broad guidance is unlikely to cause a problem but that is not to say it is an entirely risk-free activity. All professionals should be mindful of when a relaxed chat could begin to form a more formal professional/client relationship. The minute that relationship is created, they become bound by the rules of their professional body and most importantly, may owe a legal duty of care, as in this case discussed below.
In the case of Lejonvarn v Mr & Mrs Burgess  EWCA 254, the Court of Appeal awarded £265,000 in respect of a claim by a London couple who sued their neighbour for negligent advice on a garden landscape project.
The neighbour was an American qualified architect and a friend of over 10 years who had given the claimants assistance in respect of a renovation project at their home. There was no formal contract of engagement and the neighbour had, historically, provided a variety of “architectural services” to the claimants on an informal basis.
The case was decided in favour of the claimants in the High Court and was later upheld in the Court of Appeal. The court found that the architect owed a duty of care to her friends to exercise ‘reasonable skill and care’ in the provision of her professional services.
When does the relationship become formal?
1. The relationship begins when there is a mutual understanding that the friend is going to confide in the professional and the professional is going to listen and give their view.
2. The relationship can commence without a set of written terms of engagement (as in this case) or any obligation for payment in place.
3. There must be a mutual understanding that the friend has engaged the professional and the professional has accepted representation. It is the professional’s responsibility to make it clear to the potential client when this has occurred and when it has not.
Common-sense precautions that professionals can take
1. Make it clear that you are not providing formal advice and that they should instruct their own professional or come to see you in the office on a formal basis.
2. Be wary of situations where advice is sought and given between friends in an informal situation and where it might be difficult for you to provide a meaningful disclaimer that could be taken into account.
3. Keep the advice general and do not engage in detailed discussion or take full instructions.