VAT on commercial property

VAT on Rent-Free Periods and Inducements

PropertyVAT Team · Updated 21 October 2026 · 3 min read

Letting incentives are negotiated by agents and lawyers and frequently documented without a VAT analysis. Most are straightforward. The ones that are not tend to involve the tenant doing something in return.

The simple case: a plain rent-free period

A landlord grants six months rent free to induce a tenant to take a lease. Nothing else changes.

Here the tenant is not supplying anything — they are simply paying less. There is generally no supply by the tenant and therefore no VAT to account for on the rent-free period.

This is the common case, and it is why most rent frees pass without VAT ever being discussed.

Where it changes: the tenant gives something back

The analysis shifts when the tenant does something identifiable in return for the inducement.

Examples that can change the position:

• The tenant carries out works the landlord would otherwise have done
• The tenant accepts an obligation beyond simply taking the lease — a guarantee, an agreement not to exercise a break, acceptance of onerous terms
• The tenant agrees to act as an anchor to attract other occupiers

In those cases the tenant may be making a supply to the landlord, and that supply can be taxable.

The test is not whether money moved. It is whether the tenant provided something to the landlord in return.

Reverse premiums

A reverse premium is a payment from landlord to tenant to induce them to take the lease.

Where it is simply an inducement, with the tenant giving nothing beyond entering the lease, it may fall outside the scope. Where the tenant provides something identifiable in return, it is more likely to be consideration for a supply by the tenant.

The documentation matters here, because it is where the "in return for" question is usually answered — or left ambiguous.

Fit-out contributions

Common, and the most frequently mis-analysed.

The distinction is whose benefit the works are for, and whether the landlord is buying something. Tenant's own fit-out is usually the tenant's business; works that improve the landlord's asset are more likely to be a supply.

Why it matters

For the tenant. If the tenant is making a taxable supply, they must account for VAT on it. A tenant who treated a £400,000 contribution as outside the scope, and is later found to have made a supply, has a liability they did not price.

For the landlord. Whether they can recover VAT charged by the tenant depends on their own position. An unopted landlord may bear it as a cost.

For both. The lease documentation should state the VAT treatment. Silence means the question is answered later, under pressure, with money already spent.

What to settle in the documentation

1. What exactly is the tenant giving in return, if anything?
2. Is any payment stated exclusive or inclusive of VAT?
3. Who issues a VAT invoice, and when?
4. For fit-out contributions, whose works are they and who benefits?
5. Can each party recover any VAT arising?

The first question is the one that decides the rest, and it belongs in heads of terms rather than in the agreement for lease.

This guide is general information, not tax advice. Inducement VAT depends on what is actually supplied — take specialist advice on the specific arrangement.