April 4, 2022
Our April 2022 summary of the latest developments in Property law and practice is as follows:
VAT - Early termination payments
HMRC has provided an update on its treatment for VAT purposes of early termination, compensation and similar payments in its publication of “Revenue and Customs Brief 2 (2022): VAT early termination fees and compensation payments”. The policy will apply from 1 April 2022 and provides much needed clarity on supplies relating to construction and real estate.
The Brief replaces Revenue & Customs Brief 12 (2020) which had originally brought many early termination fees and compensation payments into the scope of VAT but was subsequently suspended in January 2021 with HMRC stating that its new policy would be applied from a “future date”.
Of particular concern is HMRC’s guidance on the treatment of break penalties and dilapidations.
HMRC now views any payment for early termination or any cancellation fee as consideration for a supply for VAT purposes (on the basis that these charges are for the supply of goods or services which the customer had contracted to pay under the contract).
Consequently then, where a break clause is exercised to terminate a lease, there will now be a supply for VAT purposes. However, unless an option to tax has been exercised by the party receiving the payment, the supply will be exempt. Previously it would have been outside the scope of VAT on the assumption that it was a compensatory payment included as one of the terms in the grant of the original lease.
In relation to dilapidations, there was growing concern that these may also be brought within the scope of VAT following the 2020 Brief. However, following engagement with industry on this point, thankfully the revised guidance confirms that HMRC will generally continue to treat these as outside the scope of VAT (representing a claim for damages by the landlord against the tenant’s “want of repair” rather than consideration for a supply for VAT purposes). However, HMRC highlights that it may “depart from that view if in individual cases we found evidence of value shifting from rent to dilapidation payment to avoid accounting for VAT”.
Commercial Rent (Coronavirus) Act 2022
The Commercial Rent (Coronavirus) Act 2022 has received Royal Assent and came into force on 24 March 2022. It sets out a scheme of binding arbitration for determining whether parties should be granted relief in respect of COVID-19 rent arrears and will help prevent a slew of tenant insolvencies following the general moratorium on forfeiture and other landlord remedies coming to an end on 25 March 2022.
The CR(C)A 2022 ring fences certain rent arrears (“protected rent debts”) and imposes a new moratorium which prohibits enforcement action by landlords where their tenants’ businesses were subjected to legally enforceable Covid-related closures.
For more detail on the Act and how it will be applied, please see our previous insight article here.
The Industry Working Group on Electronic Execution of Documents has published their interim report, which includes analysis of the current situation in England and Wales, best practice guidelines based on existing technology, and recommendations for future analysis and reform.
Among other things, the group considers that the three levels of signature provided under the retained law version of Regulation (EU) No 910/2014 on electronic identification and trust services for electronic transactions in the internal market (UK eIDAS) i.e. Simple or Standard, Advanced Electronic Signature (AES) and Qualified Electronic Signature (QES), provide a useful framework.
It sets out how the formality requirements for some common documents (simple contracts, deeds, real estate contracts, certain special contracts such as lasting powers of attorney, and smart contracts) can be fulfilled using these techniques.
It also briefly summarises the existing technology that is available and explains how it can be used.
For more information on the outcome and recommendations in this report, see it in full here.