VAT on Property Transactions
www.bakertilly.co.uk
VAT – back to basics
Everything is standard rated unless there is an exception
• A lot of land supplies are exceptions
Land exempt unless:
• option to tax applies; or
• an exception to the exception
(e.g. Garages/ parking, holiday homes etc.)
But
• new commercial buildings – standard rated
• new dwellings – zero-rated
• property conversion work – reduced rate
Depending on your point of view exemption not necessarily a good thing
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VAT Rate’s Applicable on Property Transactions
20% or
Exempt
5%
Exempt
or 20%
VAT Exempt
0%
0% &
20%
20%
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VAT on Property Transactions
− Complex
− Subject to special rules / regimes
− High value transactions
− Subject to a number of anti-avoidance measures
− Getting it wrong can be costly!
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What am I going to Cover?
− VAT liability
New and old Commercial, Residential, Relevant Residential and Relevant
Charitable Purpose.
− Option to Tax
− Capital goods scheme / change of intention
− Transfers of going concerns
− Building materials and fixtures
− Building contracts, payments and tax points
− Anti-avoidance measures
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VAT Liability – New Commercial
− Grant of a major interest in a new commercial / civil engineering work
= Standard Rated
− What is a major interest?
Freehold sale or a lease of more than 21 years
− What constitutes commercial?
Not designed as a dwelling/s nor to be used for Relevant Residential
Purpose (RRP) or Relevant Charitable Purpose (RCP)
− What constitutes new?
Three years from practical completion
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VAT Liability – Old Commercial
− Grant of any interest in land or buildings eg sale of bare land / lease of an
office block etc = exempt from VAT
− Subject to the ‘Option To Tax’ – which converts exempt supplies into taxable
supplies
− Supplies of ‘existing / old’ commercial property can be either exempt or
standard rated
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Residential – New Build
− New Residential = Zero Rated
− supply in the course of construction of a building designed as a dwelling
(NB: excludes specific professional services / F&F)
− first grant of a major interest in a building being designed as a dwelling
(or conversion of a non-residential building into residential use)
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Residential – Conversions of Existing Dwellings /
Non Dwellings into Dwellings
Reduced Rating 5%
− applies to construction services which result in a changed number of
dwellings e.g.
 a maisonette with two dwellings converted into a single house
 a house converted into two or more flats
 a building with five flats converted into three
− Applies to construction services of renovating ‘empty’ dwellings
 Empty means unoccupied for over two years
− Special Residential Conversions
 Creating a dwelling from commercial / non-residential property
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VAT Liability
Relevant Residential Purpose = Zero Rating
−
−
−
−
−
a home / institution providing residential accommodation for children and
people requiring personal care and support
hospice
boarding school accommodation
Monastery / nursery or an institution which is the sole or main residence of at
least 90% of its residents
(NB: exclusions are hospitals, prisons, hotels, inns)
Relevant Charitable Purpose = Zero Rating
−
−
−
−
used otherwise in the course of furtherance of a business
places of worship
offices used by charities for administering non-business activity e.g.
collections of donations
school building
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Summary of VAT Liabilities Applying to Property
Transactions
− New Commercial = Standard Rated
− Old Commercial = Exempt or Standard Rated
− Residential New Build = Zero Rated
− Residential Conversions
 changed number of dwellings
 renovating empty dwelling
 special residential conversion
Reduced Rated
− Live work units / New Build part commercial and part residential
= subject to apportionment 20% / 0%
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Option to Tax (OTT)
− How specific will an OTT be?
− Demolitions / new buildings
− Extensions
− Linked buildings
− Exclusions for new buildings
− Revoking an OTT
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Disapplication of Option to Tax (OTT)
− Sale of land to Housing Association
Costs
− Land £2m + VAT £400k
− Prof fees £200k plus VAT £40k
£4m + VAT
Housing
Association
Profit £1.8m
Costs
Land £2.4m
− Prof fees £240k
£4m no VAT
Housing
Association
Certificate disapplies
OTT
Profit £1.36m
− “Golden Brick” Solution
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Option to Tax (OTT)
− Converts certain supplies of land and property from being an exempt supply
into a taxable supply
− OTT must be notified to HMRC identifying land / buildings covered (letter /
form VAT 1614A)
− Used to support the recovery of input tax that would otherwise be lost /
restricted
− Post option all supplies made in relation to that land / building will be subject
to VAT unless:






dwelling / conversion into a dwelling
residential caravan parks / houseboat moorings
if the option has been revoked
supplies made to charities who will use the building for RCP
Housing Associations
anti-avoidance measures apply
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Option to Tax (OTT)
OTT is disapplicated if anti-avoidance measures invoked:
− Applies to an interest in land / building of more than £250k (a CGS asset)
− Use made of the land / buildings is for VAT exempt purposes (ie at least 80%
exempt)
− The land / buildings are occupied by:
 The grantor
 Person connected with the grantor
 A development financier
 A person connected with the development financier
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Option to Tax (OTT)
Disapplication of OTT
Dev Co
1
3
Bank
Co
50 year
lease
£10m
2
1. Landowner sells land to Dev Co subject to OTT for £3m plus VAT of £600k.
2. Bank Co provides funding of £10m to Dev Co (£3m for land and £7m for build costs
3. Dev Co OTT and leases new building to bank for £300k pa plus VAT of £60k pa on 50
year lease.
4. As Bank Co and Dev Co are connected OTT is disapplied and Dev costs increase by
£2m.
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Option to tax
•
Land is exempt from VAT
•
Option to tax changes supply to standard rated
•
Not applicable to residential/ charitable property
•
New buildings do not need an option if freehold sale
•
Option to tax must be exercised
•
If previous supplies made permission might be needed
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VAT – Capital Goods Scheme (CGS)
− Applies to interest in land or business with a value
of more than £250k plus VAT
− Requires businesses to monitor ‘use’ made of land
/ buildings over a ten year period
− Where ‘use’ made changes this can result in a
clawback / further reclaim of VAT
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VAT Capital Goods Scheme (CGS)
2010
ABC Plc buys commercial new office for
£1m
Plus VAT £175k which it recovers in full
2014
ABC Plc sublets 1/3 of property which is
surplus to requirements to insurance
company (no OTT)
CGS Adjustment = Exempt usage is 33% in 2014
Initial VAT reclaim £175k ÷ 10 =
£17.5K x 33% = £5775 clawback
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Change of Intention
− Developer constructs block of ten residential flats with intention to grant a
major interest of all flats – incurs VAT of £1m on land / Professional fees /
F&F etc
− Sells 100 year lease interest in 7 flats
− Leases other 3 flats on 12 month short term
tenancies
HMRC calculate any clawback based on use
over a 10 year period
.
£1m ÷ 10 = £100k x 30% = £30k clawback
..
pa
− Solution – crystallise a grant of a major interest in entire build
prior to exempt supplies being made
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CGS example
Solicitor buys new office (new build) for £1M plus VAT of £200K
Fully taxable use of office - VAT claimed back in full
After 5 years Solicitor merges with another firm and moves into their premises,
selling this office
The building is not opted so the sale is exempt from VAT
Capital Goods Scheme applies
Adjustment =
£200K ÷ 10 x 5 adjustments = £100K
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VAT on Listed Buildings
Pre 1 October 2012
− Repairs and Maintenance = Standard Rated
− Approved Alterations = Zero Rated
Post 1 October 2012
− Repairs & Maintenance = Standard Rated
− Approved Alterations = Standard Rated
Transitional Regime for Approvel Alterations
− Zero rating can apply on works up until 30/09/15, if:


A relevant consent applied for before 21/03/12, or
A written contract entered into before 21/03/12
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VAT on Listed Building – Substantial Construction
Pre 1 October 2012
 First grant of a major interest in a substantially reconstructed listed
building was zero rated if 3/5 of the work (by cost) were approved
alterations.
Post 1 October
 Zero rating will be restricted to the first grant of a major interest in a
protected building substantially reconstructed from a shell.
Transitional provisions – Zero Rating applies on a major grant of a
substantially reconstructed building if:
−
3/5 of works are approved alterations (by cost) and
−
Within scope of a relevant consent pre 21 March 2012 or written contract entered into
before 21 March 2012 or
−
10% of the substantial reconstruction (by cost) has completed prior to 21 March 2012
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VAT – Building Materials & Fixtures
 Zero rating and reduced rating on construction
services also applies to building materials /
fixtures which are ordinarily incorporated into a
building of that description.
 Incorporated means that to remove would require
use of tools / remedial work to fabric of the
building e.g.
-
Kitchen furniture
Boiler / storage heater wired and plumbed
A/C and heating systems
Bathroom fittings
Fire alarm / smoke detectors / burglar alarms
Flood lights
Topsoil / shrubs / turf
Swimming pools!
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VAT – Building Materials & Fixtures
Definition of ordinarily incorporated will vary
depending upon purpose of the building
−
RRP and RCP sales - external lighting systems /
blinds and shutters
−
Schools – blackboards / whiteboards,
gymnasium wall bars, notice and display boards
−
Churches - alter, font, lectern, pipe organs,
church bells
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VAT Building Materials and Fixtures
Specific exclusions:
−
Finished or prefabricated furniture
−
Electrical / gas appliances
−
Carpets or carpeting material
−
Luxury fittings
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VAT – Building Contracts, Payments and Tax Points
 Single payment contracts
-
Normal tax point rules apply so tax point earlier of receipt of payment or issue of an
invoice.
 Stage or interim payment contracts
-
Receipt of payment / issue of invoice / authenticated receipt
Subject to special anti-avoidance rules which creates tax point on completion of works.
 Liquidated damages
-
Not payment for a supply ... No vat due
Cannot offset liquidated damages against payments for a supply
 CITB levy
-
Deducted from value of supply before calculating VAT
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VAT Standard rated
Compulsory Standard Rated
•
•
•
•
•
•
New Commercial & Civil Engineering (freehold sales)
Parking (facilities for parking)
Rights - Fishing, timber, camping etc.
Hotels and similar
Sporting or entertainment entrance fees
Storage fees
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Surrenders etc
• Premiums on assignment - exempt (with option to tax)
• Reverse premium on assignment – taxable
• Surrender – exempt (with option to tax)
• Reverse surrender – exempt (with option to tax)
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Transfer of Going Concern (TOGC)
TOGC – supply disregarded for VAT purposes
If elected or new [non-residential] property involved
• Purchaser must elect and notify HMRC prior to grant – beware of
auctions
• Advisors for vendors must get copies of election and acknowledgement
• Advisors for purchasers should get copies of vendor’s original election
and HMRC’s acknowledgment
• Deposit payments on exchange – “Stakeholder” accounts?
• Anti avoidance rules apply between ‘connected parties’
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TOGC
TOGC
Not a TOGC
• Part tenanted (no matter how
small)
• Let with rent free period
• Lease granted, but not yet
occupied
• Site sold as a package and
some units not yet occupied
• Tenant is member of landlord’s
or purchaser’s VAT group only if
other tenants present
• Actively marketed but not let
(yet)
• Freehold owned and a lease
granted
• Head lease owned and a sublease granted (but………….)
• Sold to existing tenant occupying
whole premises
• No other tenants, and tenant is a
member of vendor’s or
purchaser’s VAT group
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Property Development
• Purchase
• Freehold
• Leasehold
• TOGC
• Option to tax & disapplication
• Barter
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Barter Transactions
• A owns land with existing commercial properties
• B wants to buy land and develop into flats
• A agrees to sell land for £1M plus a lease of new commercial unit
VAT position
• Consideration includes commercial unit
• Valued at cost
• VAT depends on option to tax
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Property & VAT
Structured Approach
What
are you
buying?
What are
you
building?
What will
you do
with it?
VAT position
Will we incur VAT?
Can we recover VAT?
For example:
Bare Land
New Dwellings
Short Lets
Exempt or VAT
if opted
Zero rated
Exempt
Office Block
Convert to Flats
Long leases
Exempt or VAT
if opted
Reduced rate
Zero rate
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Nice & straightforward
Any questions?
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Contacts
John Forth
Director
Richard Urron
Associate Director
T: +44 (0)113 285 5000
T: +44 (0)191 255 7000
E: john.forth@bakertilly.co.uk
E: richard.urron@bakertilly.co.uk
This communication is intended to provide general guidance on matters of interest and you should not act or refrain from acting upon any information
contained in it without seeking appropriate professional advice
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members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are
an incidental part of the professional services we have been engaged to provide.
Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment
business activities.
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