Rightsizing your charities office needs

As return-to-work policies have settled, many social purpose and non profits are discovering that they need less office space than before the pandemic. Meanwhile, demand for office space is increasing in some areas as more organisations re-introduce full-time office working.

Most office rentals are subject to VAT, which for most social purpose and non profits represents an additional cost. Therefore, it is important that your organisation considers VAT when making rightsizing decisions.

The option to tax

By default, office rent is exempt from VAT. However, most landlords will have exercised the option to tax, which means they have to charge VAT on premiums, rents and service charges to their tenants, however they can recover VAT on the costs of acquiring, refurbishing and maintaining the building.

For most commercial tenants, the addition of VAT is not an issue. Given the landlord’s ability to recover VAT on service charge costs, it should be cheaper for them if the landlord has opted to tax. However for social purpose and non profit tenants, this VAT is often not recoverable.

Exiting the existing lease

Some organisations may have an upcoming break clause, allowing them to exit their lease without penalty. For others, exiting the lease may require paying a premium.

If the tenant has to pay the landlord to terminate their lease early, this payment is treated in the same way as rent and will be subject to VAT if the landlord has opted to tax.

On the other hand, if the landlord has a more lucrative tenant lined up, they may be willing to pay the organisation to surrender the lease early. In this case, the payment is exempt unless the organisation has opted to tax.

Leasing smaller premises

Once you have found a new office space to suit your needs, the question will again be: has the landlord opted to tax? Some key things to consider are:

• If a business has previously been using the office for its own purposes but decides to reduce its footprint by letting out one of the floors, it may not have done this yet.
• If a landlord has opted to tax, this may have been a long time ago and therefore it could possibly be revoked.
• If the landlord has opted to tax within the last six months, they may still be able effectively to withdraw this.

Either way, engaging in early discussions on this issue can lead to significant VAT savings in the long term.

To encourage an organisation to sign a lease, the landlord may be willing to pay some form of inducement or grant a rent-free period to encourage the organisation to sign the lease, which is typically outside the scope of VAT. However, the position becomes more complicated when both parties start undertaking work, such as fit-outs, that would normally be part of the other’s responsibilities.

With evolving work patterns, many landlords and tenants will be facing these challenges for the first time. Although numerous factors must be considered during an office move, VAT certainly needs to be numbered among them and addressed early.

If you would like to discuss this further, please contact Adam Cutler or your usual Crowe contact.