Property lease 'catch-all' condemned by tax experts

Pressure is mounting for the Government to back down on plans to close a VAT loophole for property tax.

In November’s Budget, Chancellor Kenneth Clarke withdrew a landlord’s ‘option to tax’ on new property leases for a tenant who does not use the premises mainly for taxable purposes. But the ‘catch-all’, designed to stamp out abuse by the banking and insurance sectors, has the potential to hit all landlords.

Levy Gee’s VAT services director, Vaughn Chown, said: ‘I don’t think the Government has thought it through. There was a definite abuse of the law by certain sectors, but this proposal goes way over the top.’

According to City solicitors Lawrence Graham, the VAT change, which took effect from 26 November and is due to be debated by the Finance Bill Committee this week, has resulted in many ‘normal’ leases not being granted. Some landlords have protected themselves by demanding massive extra costs up front and many property-owning institutions are recalculating the potential return on investments to which they are committed.

Institute of Directors taxation executive Richard Baron warned: ‘This will both increase tax costs in cases where there was no tax avoidance, and impose a substantial regulatory burden on landlords.

‘This clause should be replaced by a much more targeted provision to tackle significant abuses of the option to tax.’

Chairman of the Institute of Indirect Taxation’s technical committee Robert Maas added: ‘The proposals seem to us to undermine some of the basic principles of VAT as it will disallow relief for input tax at an early point in the supply chain instead of the tax being borne only by the final consumer.’