VAT jargon buster

In order to help you understand the complex language of VAT in respect of any property transactions or dealings that you are involved in, our VAT property specialists have identified some of the most frequently occuring (and potentially confusing) terminology and provided some straighforward definitions:

• Anchor tenant – where a landlord gives an inducement to an incoming tenant whose presence will attract other tenants to enter into leases.
• Annex(e) – an extension/addition to a building, often with self-contained functions.
• Anti-avoidance warranty – a statutory warranty given by the buyer where a tenanted property subject to the option to tax is sold as a TOGC.
• Approved alteration – A structural alteration to the fabric of a listed building where listed building approval was required, sought and obtained.
• Assignment – typically where a tenant is looking to vacate and transfers his leasehold interest to an incoming tenant. An assignment can result in a surrender and re-grant with different VAT consequences.
• Building materials – goods ordinarily incorporated by builders that can qualify for the same VAT treatment as the construction services.
• Business – in this context it refers to a property used for the making of supplies of goods or services in the course of an economic activity for VAT purposes. Typically refers to owner occupation for the purpose of a business activity or its leasing to tenants being the supply of services in the course of business. See ‘Non-business’ as well.
• Capital goods scheme – a mechanism for spreading the input tax incurred on computer equipment exceeding £50,000 or property exceeding £250,000 of standard-rated cost
• Change in the number of dwellings conversion – where a house is converted into flats or vice versa, or a non-residential building is converted for use as a dwelling(s), and refers to situations where the 5% reduced rate may apply to construction services.
• Consideration – something that is done or given in exchange for something else. Consideration can be in monetary or non-monetary form.
• Conversion – refers to the conversion of a non-residential building to one designed for use as a dwelling(s).
• Curtilege – the area immediately surrounding a building that is regarded as part of the property.
• Design and Build Contract – an all-encompassing contract with the builder to design and build the required property. The builder incurs the costs of architects, surveyors and other professional advisers and includes these costs in the overall price for the project. Can offer a VAT advantage for the professional services if the project qualifies for the zero or reduced rates of VAT.
• Designed as a dwelling – a property originally designed for use as a dwelling, irrespective of any subsequent alternative use to which the building may have been put.
• Dilapidations – works carried out by a vacating tenant to return the property to its previous state, otherwise compensation (Dilapidations) paid to the landlord.
• Disapplication – refers to a situation where the VAT position of a tenant or buyer of a property can render the vendor’s/landlord’s option to tax ineffective.
• Dwelling – a place of residence where somebody will live in as a ‘home’.
• Exempt supply – a supply that is exempt from VAT by law. It is not a taxable supply and generally does not allow the recovery of VAT incurred on associated expenditure.
• Façade – a wall in this context that is retained for Conservation Area reasons.
• Grant – the supply of an interest in land.
• Inducement – often a cash sum given by a landlord or an outgoing tenant to a prospective incoming tenant to encourage them to enter into a lease or accept an assignment respectively. Often geared towards a contribution to the tenant’s fit-out costs (see below). See also ‘Rent-free Period’.
• In the course of construction – building works that take place and are related to the construction of a building prior to its completion.
• Input tax – VAT incurred on expenditure associated with business activities.
• Interest in or right over land – whether it be owning the lease, freehold or paying rent, that person has an interest/right over the land granted to that person.
• Landlord’s Fit-out – major works, often structural, carried out to the property that are the landlord’s responsibility. Often carried out for the landlord for convenience by a tenant during the tenant’s fit-out.
• Licence to occupy – a person is given a license/permission to occupy land that falls short of a formal tenancy.
• Listed building – A building that is protected by the State – Grade I or II listed and is, or is intended to be, used as a dwelling. Beneficial VAT rules can apply for building works.
• Major interest – the grant of a freehold interest or a lease for a term exceeding 21 years in England, Wales and Northern Ireland, 20 Years in Scotland.
• New building – has a specific meaning in VAT to refer to a commercial building less than three years old where a freehold disposal is compulsorily standard-rated.
• Non – business – in this context typically refers to the ownership or occupation by a charity or not-for-profit body for activities not deemed to be the carrying on of a business for VAT purposes. Held by the Courts that this can include the charging of nominal sums for occupation provided this is simply to recoup costs and not done with any commercial motives.
• Non-residential – A building not used as a dwelling.
• Option to tax – sales or lettings of a building are generally exempt. However with commercial buildings the landlord can elect to waive exemption such that future lettings or disposals are subject to VAT. This election is commonly called the ‘option to tax’. This can be an advantage as it allows recovery of input tax on costs where exemption does not.
• Partial exemption – where a business incurs input tax on both taxable and exempt activities then it is partially exempt and will probably have to carry out calculations to apportion the VAT incurred on expenditure between that which can be claimed and that which cannot.
• Pre-election input tax – VAT incurred prior to opting to tax a building.
• Pre-registration input tax – VAT relating to the business activities that has been incurred prior to VAT registration.
• Rent-free Period – a common example of an inducement (see above) offered by a landlord to encourage a prospective incoming tenant to enter into a lease.
• Relevant charitable purpose RCP – refers to the building’s use by a charity either for non-business purposes or for use as a village hall or similar.
• Relevant residential purpose (RRP) – refers to the building’s institutional use as a dwelling or for certain other stipulated residential purposes.
• Reverse surrender – a situation where a tenant surrenders an onerous lease back to the landlord, but has to pay the landlord to take it back.
• Revocation – the ability to revoke an option to tax after six months or 20 years.
• Single Household Dwelling – a dwelling designed for occupation by a single household and refers to certain situations where the 5% reduced rate may apply on construction services.
• Substantial reconstruction – certain major works to a listed building where the property is demolished so that no more than the external walls remain standing together with other features or archaeological or historic interest.
• Supply – the providing of goods or services normally in return for payment (consideration)
• Surrender – a situation where a tenant surrenders his valuable lease back to the landlord in return for payment from the landlord.
• Taxable supply – a supply subject to UK VAT at the standard, reduced or zero-rate. A taxable supply allows the recovery of VAT incurred on associated expenditure.
• Tenant’s Fit-out – internal works a new tenant will carry out to design and fit-out the property to his needs. Works normally need to be removed on vacating the property or compensation paid to the landlord (see dilapidations). Often partly paid by contributions from the landlord or outgoing tenant.
• TOGC – Transfer Of Going Concern, – the sale of the assets of a business as a going concern – a beneficial situation in most circumstances since, if applied correctly, no VAT is charged also saving additional Stamp Duty Land Tax in many situation.
• Zero-rated – a taxable supply subject to UK VAT at a rate of 0%.