The VAT treatment of land and property transactions has evolved into one of the most complex areas of the tax. Given the high values of many property deals, it is important for businesses structuring a deal to understand the VAT implications right from the outset.
Below, we have provided answers to some of the most common questions our clients ask us about VAT in respect of property.
Why is it so complicated?
As with all VAT situations, UK law is derived from broad European principles, upon which the domestic VAT legislation of all the EU member states is based. In the UK’s case, this has to be interpreted on top of centuries-old UK land law. It can be an uneasy combination. In addition, you will commonly find different treatments in Scotland.
Is there a general rule of thumb?
Yes, there is, but we stress that it is very broad. In general, land and property transactions are exempt from VAT unless they are specifically identified as being standard, reduced or zero-rated. Some exceptions to the general exemption include:
- compulsory standard-ratings for the freehold sale of a new commercial building;
- zero-rating for the construction of residential accommodation;
- work on protected buildings, where zero-rating may be available for either the building works or a subsequent disposal;
- reduced-rate (5%) for certain works to existing dwellings to regenerate housing stocks.
What do ‘major interest’ and ‘new’ mean?
A ‘major interest’ refers to either a freehold sale or a lease for a term exceeding 21 years. The term ‘new’, for VAT purposes, refers to commercial buildings less than 3 years old.
I buy old buildings and convert them into flats. Will I lose all the VAT on my costs?
This depends largely on whether you are actually converting commercial premises into residential accommodation, or simply altering and refurbishing existing residential accommodation.
The means by which you dispose of the final accommodation can also have a significant bearing on the VAT treatment. Potentially, the end result could be that you achieve anything from a full recovery of the VAT on your costs to a part recovery or in some cases, lose the VAT entirely.
Our in-house VAT specialists can advise on ways to structure deals in order to maximise the recovery of VAT (or, perhaps more relevant in some cases, minimise the cost).
I let property. How do the VAT rules affect me?
Again, as before, the letting of property is primarily exempt from VAT.
This applies to both commercial and domestic lettings. However there is a special facility available for commercial letting called the ‘option to tax’. In effect, by adhering to certain conditions, you can elect to waive the exemption that would normally apply to your rents and opt to charge VAT instead.
When is it of benefit to do so?
By opting to charge VAT on the rents, you will be able to recover VAT on the costs you incur in relation to that building. You must be aware of the VAT position of your tenants though. If they are able to recover all the VAT that is charged to them, then paying VAT on their rent will not represent any additional cost to them. If, however, they are themselves partially exempt or perhaps even not registered for VAT, then any VAT you charge will be an additional cost to their business, and you may decide that the benefits of the option to tax are outweighed by commercial considerations.
How long does the option last?
After an initial ‘cooling off’ period of six months, the option will be in force for 20 years.
It is important to be aware that the option, once taken out, applies to all transactions relating to the ‘opted’ building. If you decide to sell the freehold some years later, then you will have to charge VAT on the sale. Special rules apply to parades, ‘multiple occupancy’ premises and other complex site situations.
It sounds too easy. What’s the catch?
Over the years, HMRC have brought in ever-more complex anti-avoidance legislation, which may block your option to tax in some circumstances. The consequences could be significant in terms of VAT costs which you had not anticipated.
What about surrenders and variations of leases?
Surrenders, reverse surrenders and variations of leases are generally regarded as transactions in land in their own right; following the same basic rules. They can, in some circumstances, follow the VAT treatment of the original transaction, or have their own separate VAT implications.
I’ve heard of something called the ‘Capital Goods Scheme’. Does this affect me?
Possibly. It will affect you if you have acquired, constructed, converted, extended or refurbished a property where the costs you have incurred that bear VAT are in excess of £250,000.
If you are partially exempt, you will have to adjust the amount of input tax that you recover in the first year, over the next 9 intervals (each normally being one year in length), according to how the use of the building changes for VAT purposes.
Not surprisingly, there is again anti-avoidance legislation which may affect the calculations that you may have to carry out, or the amount of VAT that you can reclaim.
What happens if I am buying or selling a tenanted building?
In many circumstances, this will be eligible for treatment as a VAT-free transfer of a going concern where the property is regarded, in effect, as if it were a business in its own right.
There are important implications for both the vendor and the purchaser of the property in question. These affect not only the VAT treatment for your sale, but also the terms of the contract itself, and the written notification that may have to be given to HMRC and Excise. If you get any of this wrong, it can prove to be expensive; HMRC will either assess you for the VAT that should have been accounted for, or assess the buyer for the input tax that he may have claimed incorrectly. Needless to say, the imposition of interest and/or penalties will not be far behind.
We can advise on how to structure the deal to your best advantage with the appropriate contractual negotiations and undertake to inform HMRC when necessary.