Tag Archives: land-and-property

What is a VAT Loan? – Business finance

By   8 August 2024
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Although, ideally, a business puts aside the VAT it collects from its customers (output tax charged) to pay its monthly, quarterly, or annual VAT bill, cashflow management can be difficult, especially for small or seasonal businesses with limited cash reserves. There are some things a business can do to mitigate the impact of VAT and one of these is a VAT loan.

Failure to pay VAT on time can lead to penalties and interest which could add to a business’ financial woes.

A VAT loan is a product which provides a short-term financing option to pay VAT on time. The loan covers the VAT amount due during each payment period, which allows a business to spread the VAT cost over a longer time instead of paying it up front in one hit.

Furthermore, there is no need to use up an existing bank facility. A VAT Loan gives a business an alternate financial option to utilise.

How it works

A business can apply for a VAT loan from a bank or other lender. It is usually deemed to be a secured business loan so assets must be put up as security. Once approved, the lender will pay it directly to HMRC. Repayment periods are typically between three months and a year.

The whole process does not usually take long as it is designed to be more streamlined than a standard loan. The money is usually paid to HMRC within days. Evidence of turnover and good credit history will be required, along with usual proof of ID and bank statements etc. Sometimes additional arrangement charges are made along with the interest.

Eligibility

A business must:

VAT bridging loans

There are generally two types of VAT loan: a standard VAT loan and VAT bridging loans. VAT bridging loans differ in that they are specifically a short-term option to assist a business bridge its cashflow gap between making a VAT payment, eg; for a significant purchase, usually property, and recovering this amount from HMRC as a repayment, which can take months (depending when the purchase was made in a VAT quarter and how quickly HMRC make the refund).

Finding a lender

 It is usually advisable to look for a lender who offers VAT loans specifically and compare interest rates, terms, fees etc.

A quick Google produces many VAT loan products to compare.

Downsides

As VAT loans are short term, the interest rates are often higher than other business loans. Additionally, the loan repayments and fees increase strains on a business’ financial commitments.

 

This is a brief overview on the mechanism and does not constitute financial advice. Businesses should seek their own financial counsel. Before signing any loan agreements, you should seek independent financial advice to better understand if a VAT loan you are considering is the right one for you.

VAT – Understanding land and property issues

By   8 July 2024
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Help!

Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 10% 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a taxpayer is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.

Why is VAT important?

The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. This is increased by the fact that these are often one-off transactions by a business, and in-house, in depth tax knowledge is sometimes absent. Such activities can result in large penalties and interest payments, plus unwanted attentions from VAT inspectors. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.

Problem areas

Certain transactions tend to create more VAT issues than others. These include;

  • whether a property sale can qualify as a VAT free Transfer Of a Going Concern (TOGC)
  • conversions of properties from commercial to residential use
  • whether to opt to tax (OTT) a commercial property
  • the recovery of VAT charged on a property purchase
  • supplies between landlord and tenants
  • the Capital Goods Scheme (CGS)
  • the anti-avoidance rules
  • mixed developments
  • apportionment of VAT rates
  • changes in number of dwellings in a building(s)
  • changes in intention of use of a building
  • sale of partially completed developments
  • partial exemption
  • charity use
  • non-business use
  • relevant residential use
  • the place of supply (POS) of services
  • holiday lets
  • serviced apartments
  • contracts
  • new build residential
  • DIY Housebuilders
  • tax points (time of supply)
  • HMRC queries
  • deposits
  • and even seemingly straightforward: VAT registration

Additionally, the VAT treatment of building services throws up its own set of VAT complications.

The above are just examples and the list is not exhaustive.

VAT Planning

The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with a VAT adviser can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors. Experience insists that this is an area which HMRC have raised significant revenue from penalties and interest where taxpayers get it wrong.

Don’t leave it to chance!

For more information, please see our Land & Property services

VAT: Buildings and construction update

By   1 February 2024
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HMRC has amended Notice 708 which covers:

  • when building work can be zero-rated or reduced-rated at 5%
  • when building materials can be zero-rated or reduced-rated at 5%
  • when the sale, or long lease in a building is zero-rated
  • where you can find out more about the VAT domestic reverse charge for building and construction services
  • when developers are blocked from deducting input tax on goods that are not building materials
  • when a builder or developer needs to have a certificate from their customer, confirming that the building concerned is intended to be used for a purpose that attracts the zero or reduced rate
  • when a customer can issue that certificate to a builder or developer
  • what happens when a certificated building is no longer used for the purpose that attracted the zero rate, the use for that purpose decreases or the building is disposed of
  • the special time of supply rules for builders
  • when a business, on using its own labour to carry out building work on a building or civil engineering structure that it occupies or uses, must account for a self-supply charge

Sections 18.1 and 18.2 of the Notice and the certificates in those sections have been updated to show they have force of law under The VAT Act 1994, Schedule 8, Group 5, Note 12.

Extension of VAT energy-saving materials relief

By   22 January 2024
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HMRC have published a new Policy Paper on the extension of energy-saving materials (ESMs).

Installations of ESMs in residential accommodation currently benefit from a temporary VAT zero rate until 31 March 2027, after which they revert to the reduced rate of VAT at 5%.

This measure extends the relief to installations of ESMs in buildings used solely for relevant charitable purposes, such as village halls or similar recreational facilities for a local community.

It also expands the scope of the relief to the following technologies:

  • electrical batteries that store electricity generated by certain ESMs and from the National Grid
  • water-source heat pumps
  • diverters that enable excess electricity from certain ESMs to be used within a building in which it is generated rather than exported to the grid

It also adds certain preparatory groundworks that are necessary for the installation of ground- and water-source heat pumps.

The changes apply from 1 February 2024

The policy objective is to incentivise the installation of ESMs across the UK to improve energy efficiency and reduce carbon emissions.

The measures are implemented by The Value Added Tax (Installation of Energy-Saving Materials) Order 2024.

VAT treatment of serviced apartments: The Realreed Limited case

By   11 January 2024
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Latest from the courts

In this First-Tier Tribunal (FTT) case the issue was whether serviced apartments qualify for exemption.

Background

Realreed owns a property called Chelsea Cloisters in Sloane Avenue, London. The property comprises; 656 self-contained apartments and some commercial units. 421 of these apartments are let on long leases (no VAT issues arise from these supplies). The appeal concerned the VAT treatment of the letting of the remaining 235 apartments, which include studio, one-bedroom or two-bedroom self-contained rooms. The appellant has, at all times, received a significant number of occupiers from corporate customers when they relocate their employees to London for a specified period, such as a secondment.

The contentions

Realreed argued that the letting of the apartments is a supply of accommodation which is exempt under The VAT Act 1994, Schedule 9, Group 1, Item 1. Chelsea Cloisters operates like a ‘home from home’ for its tenants: it provides residential accommodation. The physical appearance of the building is very similar to that of other residential buildings in the vicinity. It does not have signage suggesting the serviced accommodation is a hotel or similar establishment. It is rare for hotels (or similar establishments) at the booking point to offer long-term availability in the same way as Realreed does. Chelsea Cloisters does not offer room service, or catering of any form. Tenants have fully functioning kitchens and other self-catering facilities within their apartments and have washing machines and dryers to do all their own laundry. Tenants can, and do, stay for extended periods of time (one for around 20 years). The business has always involved the provision of residential accommodation on a longer-term basis than would typically be found in a hotel, with a much higher degree of personal autonomy for the occupant.

HMRC contended that the use of the Apartments is carved out of the exemption in Item 1 by excepted item (d), which applies to “the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation”. Note 9 to Group 1 provides that “similar establishment” “includes premises in which there is provided furnished sleeping accommodation whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers”.

Decision

The court considered that Realreed provided sleeping accommodation in an establishment which is similar to a hotel. The two hallmarks of short-term accommodation coupled with additional services (daily maid service, linen changing, cleaning at the end of a stay, residents bar, concierge) mean that Chelsea Cloisters is an establishment in potential competition with the hotel sector, which also offers short-term accommodation with services.

The FTT found that Realreed provided furnished sleeping accommodation, so the remaining question was whether Chelsea Cloisters is used by or held out as being suitable for use by “visitors or travellers” per Note 9.

The FTT interpreted ‘visitor or traveller’ as referring to a person who is present in a particular place without making it their home, ie; they are not staying there with any degree of permanence. The average length of visit was less than a fortnight which must mean that the apartments were indeed made available to visitors or travellers.

The supplies were therefore standard rated.

Commentary

There is a distinction between leases and other room lettings for VAT. The most important issue is the degree of “permanence”, although other factors have a bearing. Businesses which let rooms should consider the nature of their supplies with reference to this case which helpfully sets out which factors need to be considered.

VAT: Changes to the DIY Housebuilders’ Scheme

By   20 November 2023
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The DIY Housebuilders’ Scheme  is a tax refund mechanism for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). This puts a person who constructs their own home on equal footing with commercial housebuilders. There is no need to be VAT registered in order to make the claim.

The Scheme can be complex, but here is our Top Ten Tips for claimants. 

The Changes

From 5 December 2023, the follow changes apply:

  • claimants will be allowed to submit claims electronically
  • the deadline for making claims will be extended to six months (from three)
  • the list of documents required to support a claim has been amended
  • a new requirement for additional evidence when a derelict building has been converted into dwelling(s) – to be made on a specific form

These changes are set out in The Value Added Tax (Refunds to “Do-It-Yourself” Builders) (Amendment of Method and Time for Making Claims) Regulations 2023 and guidance is provided by HMRC here.

The new deadline applies to claims made on, or after 5 December 2023. The deadline, broadly, begins when a dwelling is complete. There is sometimes a dispute on the completion date, so this case and commentary may be of assistance.

VAT: Revoke an option to tax after 20 years have passed – update

By   6 November 2023
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HMRC’s Form VAT1614J has been updated. This form is used to revoke an option to tax (OTT) land or buildings for VAT purposes after 20 years have passed. There is a new address to which the form and supporting documents are sent:

BT VAT

HM Revenue and Customs

BX9 1WR

Scanned copies of the form can be emailed to: optiontotaxnationalunit@hmrc.gov.uk

 

Background: Revoking an option where more than 20 years have elapsed since it first had effect.

A business may revoke an OTT without prior permission from HMRC where more than 20 years have elapsed since the option first had effect. This is done by submitting the Form VAT1614J.

When the OTT first has effect: An OTT first had effect on the day it was exercised, or any later day that was specified when opting to tax.

Who can revoke: The relevant guidance VAT Notice 742A – which has the force of law here states that the ‘Taxpayer’ can revoke the OTT. The taxpayer is defined as the person who exercised the option to tax or is treated as making that option by virtue of a real estate election.

When the revocation will take effect: The revocation will take effect from the day that the taxpayer specifies when HMRC is notified, but this cannot be any earlier than the day on which the taxpayer notifies HMRC.

Outcomes of revoking an Option To Tax

  • any income (rent or sale) relating to the property becomes exempt
  • any input tax relating to the property is not recoverable (subject to the de minimis rules)
  • if no other taxable supplies are made a business must deregister

Revocation of option: The VAT Act 1994, Schedule 10, 25(1)(a).

VAT: HMRC partial exemption guidance updated

By   18 September 2023
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VAT Notice 706 has been updated on he option to send an email to get an approval for a partial exemption special method has been removed from sections 6.2, Appendix 2 and how to apply.

Para 6.2 – “Get approval for a special method

You cannot change your method without our prior approval. You must continue to use your current method, whether that is the standard method or a special method, until we approve or direct the use of another method or direct termination of its use.

You can get approval for a special method by using the online service.

If you are unable to use the online service, contact VAT Written Enquiries team by post.

You must explain clearly how your proposed method will work, you should see Appendix 2 in this guide.

When you propose a special method you must include a declaration that the method is fair from its effective date of application, and for the foreseeable future so that from its effective date a fair amount of input tax is recovered”.

 

Examples of special methods (PESM) are:

  • sectors and sub-sectors
  • multi pot
  • time spent
  • headcount
  • values
  • number of transactions
  • floor space
  • cost accounting system
  • pro-rata
  • combinations of the above methods

Partial Exemption guidance here

VAT: Land related services

By   21 August 2023
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Whether a service is “related to land” is important because there are distinct rules for this type of supply compared to the General Rule. The place of supply (POS) of land related services is where the land is located, regardless of where the supplier or recipient belong.

The rule applies only to services which relate directly to a specific site of land. This means a service where the land is a central and essential part of the service or where the service is intended to legally or physically alter a property.

It does not apply if a supply of services has only an indirect connection with land, or if the land related service is only an incidental component of a more comprehensive supply of services.

What is land?

For the purpose of determining the POS, land (also called immoveable property in legislation) means:

  • a specific part of the earth, on, above or below its surface
  • a building or structure fixed to, or in, the ground above or below sea level which cannot be easily dismantled or moved
  • an item making up part of a building without which it is incomplete (such as doors, windows, roofs, staircases and lifts)
  • items of equipment or machinery permanently installed in a building which cannot be moved without destroying or altering the building

What services directly relate to land?

HMRC provide the following examples:

  • construction or demolition of a building or permanent structure
  • surveying and assessing property
  • valuing property
  • providing accommodation in hotels, holiday camps, camping sites or timeshare accommodation
  • maintenance, renovation and repair of a building
  • property management services carried out on behalf of the owner
  • arranging the sale or lease of land or property
  • drawing up of plans for a building or part of a building designated for a particular site
  • services relating to the obtaining of planning consent for a specific site
  • on-site security services
  • agricultural work on land
  • installation and assembly of machines which, when installed, will form a fixture of the property that cannot be easily dismantled or moved
  • the granting of rights to use all or part of a property (such as fishing or hunting rights and access to airport lounges)
  • legal services such as conveyancing and drawing up of contracts of sale or leases, including title searches and other due diligence on a specific property
  • bridge or tunnel toll fees
  • the supply of space for the use of advertising billboards
  • the supply of plant and equipment together with an operator
  • the supply of specific stand space at an exhibition or fair without any related services

What services are only indirectly related to land?

The following HMRC examples are not deemed to be land related services:

  • management of a property investment portfolio
  • drawing up of plans for a building that do not relate to a particular site
  • arranging the supply of hotel accommodation or similar services
  • installation, assembly, repair or maintenance of machines or equipment which are not, and do not become, part of the building
  • accountancy or tax advice, even when that relates to tax on rental income
  • the supply of storage of goods in property without a right to a specific area for the exclusive use of the customer
  • advertising services including those that involve the use of a billboard
  • marketing, photography and public relations
  • the supply of equipment with an operator, where it can be shown that the supplier has no responsibility for the performance of the work
  • general legal advice on contractual terms
  • legal services connected with fund raising for property acquisitions or in connection with the sale of shares in a company or units in a unit trust which owns land
  • stand space at an exhibition or conference when supplied as part of a package with related services, eg; design, security, power, telecommunications, etc.

These examples are mainly derived from case law and the department’s understanding of the legislation and they are not exhaustive.

The Reverse Charge

If an overseas supplier provides land related services in GB, the POS is GB and the reverse charge applies if the recipient is GB VAT registered.

If a GB supplier provides services directly related to land where the land is located outside GB, the POS is not GB. This means that there is a supply in another country. VAT rules in different countries vary (even across the EU) – some countries use the reverse charge mechanism, but others require the GB supplier to VAT register in the country of the POS (where the land is physically located).

VAT: Was an option to tax valid? The Rolldeen Estates Ltd case

By   18 April 2023
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Latest from the courts

In the First-Tier tribunal (FTT) case of Rolldeen Estates Ltd there were a number of issues, inter alia; whether the appellant’s option to tax (OTT) was valid, if not, whether HMRC had the power to deem it valid, whether HMRC acted unreasonably and whether appellant estopped from relying on earlier meeting with an HMRC officer.

Background

The letting of property is an exempt supply, however, a landlord the owner can OTT the property and charge VAT on that supply.  If the OTT is exercised, the supplier is able to reclaim input VAT on costs such as repairs and maintenance, but charges output VAT on its supplies.  The OTT provisions are set out at The VAT Act 1994, Schedule 10.

The appellant in this case had previously submitted an OTT form VAT1614A and charged VAT on the rent to its tenant. Subsequently, the property was sold without charging VAT. HMRC issued an assessment for output tax on the sale value.

Schedule 10

A taxpayer does not need HMRC’s permission to OTT, unless that person has already made exempt supplies in relation to that property – in particular, if the property has already been let without VAT having been charged.  In that scenario, the person must apply to HMRC for permission to exercise the OTT, and permission will only be given if HMRC are satisfied that the input tax is fairly attributed as between the exempt period and the taxable period. When OTT the company stated that no previous exempt supplies of the relevant property had been made and this was also confirmed in subsequent correspondence with HMRC.

Appellant’s contentions

The company informed HMRC that the OTT was invalid so that no VAT was due on the sale. Evidence was provided which demonstrated that Rolldeen had made exempt supplies before the date of the OTT so that HMRC’s permission had therefore been required before it could be opted. No permission had been given and therefore there was no valid OTT in place even though the appellant had purported to exercise that option. Also, the appellant submitted that it was unreasonable of HMRC to have exercised the discretion to deem the OTT to have effect, because they had failed to take into account the fact that during an inspection, HMRC had known that Rolldeen had made exempt supplies before OTT.

HMRC’s view

VATA, Schedule 10, para 30 allows HMRC retrospectively to dispense with the requirement for prior permission, and to treat a “purported option as if it had instead been validly exercised”.  HMRC issued a decision stating that it was exercising its discretion under Schedule 10, para 30 to treat the relevant property as opted with effect from the date of the VAT1614A and that VAT was due on the sale and the assessment was appropriate.

Decision

The FTT found that:

  • after an inspection by HMRC it knew that prior exempt supplies had been made
  • although HMRC knew exempt supplies had already been made Rolldeen was estopped* from relying on that fact, because both parties had shared a “common assumption” that the OTT had been valid
  • para 30 could be used to retrospectively validate the OTT (albeit only in relation to supplies made after 1 June 2008).  In this case that was sufficient as the sale of the property occurred on in March 2015
  • HMRC had not acted unreasonably because they had not taken into account their own failure to carry out a compliance check
  • this is exactly the sort of situation for which para 30 was designed
  • it was entirely reasonable and appropriate of HMRC to deem the purported option to have been validly exercised

The appeal was rejected and the assessment was valid.

Commentary

Again, proof, if proof is needed, that OTT can be a complex and costly area of the tax and care must always be taken. Advice should always be sought, as once an OTT is made, there is usually no going back.

An interesting point in this case was that no case law was cited on this issue and the FTT was unable to identify any.

* The principle of “estoppel” means that a person may be prevented from relying on a particular fact or argument in certain circumstances.