- Existing rules only reach vendor lessors. Deeming and adjustment provisions introduced a few years ago let a lessee claim input tax on leasehold improvements, while requiring the lessor to make an output tax adjustment to the extent the improvements are not used to make taxable supplies. The aim was to replicate the VAT position that would have applied had the lessor carried out the improvements itself.
- A leakage arises where the lessor is not a VAT vendor. Treasury has identified that the lessor-level adjustment currently bites only when the lessor is a registered vendor. The same concern exists for non-vendor lessors, for example a school making only exempt supplies, creating a VAT leakage because no adjustment mechanism reaches them.
- Non-vendor lessors may face a self-declaration duty. The draft TLAB proposes that lessors who are not VAT vendors may be required to account for the VAT adjustment through a self-declaration process. Parties in leases involving leasehold improvements where the lessor is a non-vendor should assess the potential impact.
Source Pieter Van Der Zwan
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