More Advanced VAT: Land and Property Ian M Harris Leicester City Council VAT & Taxation Advice Office

1. More Advanced VAT: Land and Property Ian M Harris Leicester City Council VAT & Taxation Advice Office

2. VAT & Taxation Advice Office • Who are we? • Ian Harris: Taxation Officer • Part of Resources Department • Financial Services Division • Where are we? • Room B2.10, New Walk Centre • Extension: 7470 (0116-252-7470) • Fax: 0116-255-2443 • Mobile/Text: 07980-339581 • E-Mail: vattax@leicester.gov.uk

3. Land and Property Transactions • Land and property transactions are very complex • and • Involve large sums of money • Errors can be costly! • And the law and Revenue and Customs practice are constantly changing

4. Sales, Leases and Lettings • Sales, leases and lettings may be: • non-business • standard-rated • zero-rated • exempt from VAT • possibly with the option to tax

5. Sales, Leases and Lettings • The exact VAT liability depends on: • is it a sale or a long lease or a short lease or a letting • is it land or a building • is it a ‘qualifying’ or ‘non-qualifying’ building • is it a new building • was the building built by or for the vendor/lessor/licensor

6. Construction, Alterations, Renovations and Repairs and Maintenance • Construction work may be standard-rated or zero-rated • Alterations are normally standard-rated but may be zero-rated • Renovations are normally standard-rated but may be lower-rated • Repairs and maintenance are always standard-rated • But when do repairs and maintenance become alterations?

7. Other Taxes and Duties • Land and property transactions invariably involve other taxes and duties: • Stamp Duty Land Tax (SDLT) • Construction Industry Scheme (CIS) • Landfill Tax

8. Long and Short Leases and Lettings • A long lease is one of over 21 years • A short lease is one of 21 years or less • Any right to occupy that falls short of a lease is a letting or ‘licence to occupy’

9. ‘Qualifying’ Buildings • A ‘qualifying’ building is: • a dwelling or number of dwellings • a building used for relevant residential purposes • a building used for relevant charitable purposes

10. ‘New’ and ‘Old’ Buildings • A ‘new’ building is one completed less than three years before the sale, lease or letting occurs • All other buildings are ‘old’ buildings

11. Land • Sales, long leases, short leases and lettings of land are always exempt with the option to tax • This is regardless of the purpose for which the land is to be used

12. ‘Non-Qualifying’ Buildings • Sales of NEW ‘non-qualifying’ buildings are standard-rated • Long leases, short leases and lettings of NEW ‘non-qualifying’ buildings are exempt with the option to tax • Sales, long leases, short leases and lettings of OLD ‘non-qualifying’ buildings are exempt with the option to tax

13. ‘Qualifying’ Buildings • Sales and long leases of ‘qualifying’ buildings (new or old) depend whether the building was built by or for the vendor/lessor: if so : • a sale or first long lease (premium or first rental) is zero-rated • all subsequent long leases are exempt with no option to tax if not: • any sale or long lease is exempt with no option to tax

14. ‘Qualifying’ Buildings (Contd) • Short leases and lettings of ‘qualifying’ buildings (new or old) are exempt with no option to tax • To qualify for zero-rating the purchaser/lessee must certify ‘qualifying’ use • To block an option to tax the purchaser/lessee/licensee must certify ‘qualifying’ use

15. Exceptions • The following are always standard-rated: • sleeping accommodation in a hotel, etc • catering accommodation in a hotel, etc • holiday accommodation • seasonal pitches for caravans • camping facilities • parking facilities • mooring and hangaring rights • box, seat etc at a sports ground, theatre, etc • sports facilities unless ‘block-booked’

16. Exceptions • In each of the exceptions the principle is that the rights over land or property are merely incidental to another supply • It is important to determine whether what is supplied is a right over land or other services • A right over land must be for the physical enjoyment or economic exploitation of a specifically identified piece of land

17. Specific Exceptions • Parking facilities are always standard-rated • including car, coach, bus, lorry, motor-cycle and cycle parking facilities • and including the sale, lease or let of land purpose designed or explicitly intended for use as a car, coach, bus, lorry, motor-cycle or cycle park • but excluding on-street parking which is non-business • Sports facilities are always standard-rated • unless they are ‘block-booked’ • Council housing is non-business • Allotments are non-business

18. Other Land and Property Transactions • The rules on land and property transactions apply to: • sales, leases and lettings of land • sales, leases and lettings of buildings • room lettings • lifting restrictive covenants • easements and wayleaves • licences to occupy • rental of advertising hoardings • trading franchises (but not vending machines or ‘ambulatory concessions) • lettings of market stalls

19. Peppercorn Sales and Leases • Peppercorn sales or leases are non-business • providing the peppercorn is the only consideration • A peppercorn means £1 or less • The same logic applies to free lettings (non-business provided there is no other consideration)

20. Partial Exemption • Because land and property transactions generate significant VAT-exempt income the partial exemption rules are particularly relevant

21. VATable Supplies • A VAT-registered person making VATable supplies may recover the VAT incurred in making those supplies • VATable supplies are any supplies in the course or furtherance of business liable to a rate of VAT

22. Non-VATable Supplies • Non-VATable supplies are those: • not made in the course or furtherance of business • or • not liable to a rate of VAT • (or not made by a VAT-registered person!)

23. What Supplies are VATable? • VATable supplies are: • standard-rated supplies • VAT at (currently) 15% • lower-rated supplies • VAT at 5% • zero-rated supplies • VAT at 0%

24. What Supplies are Non-VATable? • Non-VATable supplies are: • VAT-exempt supplies • supplies outside the scope of VAT • supplies not in the course or furtherance of business (non-business supplies)

25. VAT on Non-Business Supplies • VAT incurred relating to non-business (and outside the scope) supplies is irrecoverable • except for local authorities - Section 33 of the VAT Act 1994 allows local authorities to recover all VAT incurred even that relating to their non-business supplies

26. VAT on Exempt Supplies • VAT incurred relating to exempt supplies is irrecoverable • unless it is below prescribed de-minimis limits

27. The De-Minimis Limits • VAT incurred relating to exempt supplies is recoverable if it is ‘insignificant’ • Normally less than £7,500pa where this is less than 50% of all VAT incurred • but • For a local authority less than 5% of all VAT incurred including that recoverable under Section 33

28. ‘All or Nothing’ De-Minimis Limits • Where the de-minimis limit IS NOT breached all VAT is recoverable • Where the de-minimis limit IS breached no exempt-attributable VAT is recoverable • not just the excess over the de-minimis limit

29. ‘All or Nothing’ De-Minimis Limits • A local authority at 4.9% can recover all VAT incurred • A local authority at 5.1% can recover NO exempt-attributable VAT • An increase of 0.2 percentage points costs 5.1% of all VAT incurred

30. The Option to Tax • To reduce the impact of partial exemption the vendor/lessor/licensor may opt to tax • But an option to tax is irrevocable • It could affect the sale/lease/let if the purchaser/lessee/licensee cannot recover the VAT

31. The Option to Tax • Because of partial exemption though it is Council policy to opt to tax all commercial land and property transactions unless there is a pressing business or political reason not to do so

32. Scope of an Option to Tax • An option to tax covers: • any clearly delineated piece of land • and then covers any building extant thereon or subsequently constructed thereon • any specified building • and then covers that building plus its curtilage • but beware of the definition of ‘building’ (eg buildings linked by a covered walkway, buildings with direct internal access, etc) • and the option now continues to apply to the cleared land following demolition of the building

33. Blocking an Option to Tax • An option to tax is blocked: • where the sale/lease/letting is of land to an individual for use as their dwelling • where the sale/lease/letting is of land to a housing association for residential purposes • where the sale/lease/letting is of a building for ‘qualifying’ use • where the ‘person funding development’ rules apply

34. Exercising an Option to Tax • An option to tax is exercised by taking a recorded decision to opt • eg correspondence between Property Services and the VAT & Taxation Advice Office • An option to tax must be notified to Customs within 30 days • Customs acknowledgment is evidence of a valid option to tax • Where prior exempt supplies of land or property to be opted Customs’ prior permission required • Invariably grated and can usually opt from date permission sought • All options to tax are exercised by VAT & Taxation Advice Office

35. Lapsing an Option to Tax • An option to tax lapses if no interest in the land and property in question is held for six years • But beware maintaining a restrictive covenant or similar is an interest in the land or property

36. Sales - Some Specific Issues • Receipt of a deposit for a VATable transaction creates a tax-point • unless an independent stakeholder is used • If VAT is not mentioned the consideration is VAT-inclusive • (currently) 3/23rds of the consideration is VAT • Sales of an opted property with a sitting tenant could be a TOGC

37. Sales - Some Specific Issues (Contd) • Vendor’s fees paid by the purchaser follow the VAT liability of the sale • Compulsory Purchase Orders follow normal land and property VAT rules • remember if the vendor is not VAT-registered the CPO must be outside the scope • Where payment is by instalments, completion creates a tax point for the full value of the sale • ‘Overage deals’ create a series of tax points for each payment

38. Leases - Some Specific Issues • Lease surrenders and reverse-surrenders follow the normal VAT rules for land and property • but watch whose option to tax counts • Lease variations can create a VAT liability • Statutory ‘notice to quit' payment are outside the scope • but lease surrender payments are not

39. Leases - Some Specific Issues (Contd) • Reverse premiums and inducement payments are not normally consideration for a supply and are outside the scope of VAT • unless the tenant does make a supply to the landlord, eg an anchor tenant • which is normally VATable • Lease assignments follow the normal VAT rules for land and property • but watch whose option to tax counts • Reverse assignments are like reverse premiums • ie there is not normally a supply

40. Leases - Some Specific Issues (Contd) • Lessor’s fees paid by the lessee follow the VAT liability of the lease • Rent-free periods can be a barter • what is the lessee doing for the lessor? • both transactions follow normal VAT rules • you must exchange VAT invoices • there could be a VAT mismatch

41. Leases - Some Specific Issues (Contd) • Service charges follow the VAT liability of the lease if an integral part of the right to occupy • eg rates, insurance, unmetered heat and light, external fabric repairs • Service charges follow their own VAT liability if a separate quantified supply • eg telephone, metered heat and light

42. Construction • Construction is standard-rated • unless the building is a ‘qualifying’ building • the purchaser certifies ‘qualifying’ use when zero-rating applies • Demolition and civil engineering works can also be zero-rated for ‘qualifying’ buildings • Normal fixtures and fittings for ‘qualifying’ buildings can also be zero-rated • But professional services (architects, surveyors, etc) are always standard-rated

43. Alterations • Alterations are standard-rated • unless the building is a ‘listed’ building • the work requires and is granted listed building consent and constitutes substantial reconstruction or approved alterations • the building is to be used as a ‘qualifying’ building when zero-rating applies • Alterations to a non-residential building that create a new dwelling(s) are zero-rated

44. Renovations • Renovations to - • a single household dwelling or dwellings (eg a house or flats) • a multiple occupancy dwelling (eg bed sits) or • a building used for ‘qualifying’ residential purposes (eg a residential care home) • that has not been lived in for 2 years or longer • are lower-rated • Renovations to a garage(s) at the same time are also lower-rated

45. Conversions • Conversions of a single household dwelling or dwellings (eg a house or flats) or a multiple occupancy dwelling (eg bed sits) or a building used for ‘qualifying’ residential purposes (eg a residential care home) into - • a different number of single household dwellings or a multiple occupancy dwelling or a building used for ‘qualifying’ residential purposes • are lower-rated

46. Conversions (Contd) • Conversions of a non-residential building into - • a single household dwelling(s) or a multiple occupancy dwelling or a building used for ‘qualifying’ residential purposes • are lower-rated • Conversions to create a garage(s) at the same time are also lower-rated

47. Repairs and Maintenance • Repairs and maintenance are always standard-rated

48. Stage Payments • For stage payments a tax point occurs: • when payment is received by the supplier • the supplier issues a VAT invoice • in certain circumstances on completion if the developer and occupant are connected parties • The supplier may issue an authenticated receipt in lieu of a VAT invoice • Input VAT on stage payments may be recovered prior to receiving an authenticated receipt • providing one is received! • All authenticated receipts should go through Control and Support

49. Retention Payments • VAT on retention payments: • per the supplier’s VAT Invoice (even if the invoice is not paid in full) • or • per the actual amount paid if an authenticated receipt is issued

50. Bonds, Deposits, Performance Guarantees • Bonds, deposits, performance guarantees paid by a contractor are outside the scope of VAT • If used to fund the work ‘bonded’ treat as an earmarked donation (still outside the scope but VAT recoverable on the works undertaken) • unless there is a supply of the works to the contractor