Energy saving: Insulation, solar panels, wind turbines, wood-fuelled boilers and air-source heat pumps are subject to a reduced rate of VAT at 5%, but the installation of secondary or double glazing is at the standard rate of 20%.
Tag Archives: property
The ABC of VAT – property
Anyone who has had even the slightest brush with VAT will know that it is a very complex tax. Now, multiply that complexity by the intricacy and occasionally arcane nature of property law and one may see that the outcome will be less than straightforward. I have produced a general guide and an article on residential property VAT Triggerpoints
I hope the following glossary will help with steering through some of the difficulties.
- Annex– a building which is joined to or is next to a larger main building usually an extension or addition to a building
- Assign – to transfer the right or interest in a property from one party to another
- Break clause – a clause allowing either landlord or tenant to give written notice after a particular date or period of the tenancy in order to end the tenancy
- Beneficial owner – party deemed to make a supply of property rather than the legal owner
- Blocked input tax – VAT which a developer is unable to recover when constructing a new dwelling. Typically, expenditure on good such as; carpets, fitted furniture, and gas and electrical appliances
- Building materials– goods ordinarily incorporated into a property which attracts similar VAT treatment to the construction services.
- Capital Goods Scheme(CGS) – a method of calculating the recovery amount of input tax incurred on property over a ten-year period, Details of the CGS here
- Certificate – a document issued to a supplier in order to obtain certain zero-rated or reduced-rated building work
- Change of number of dwellings– usually a conversion from commercial to residential, or a single house into flats (or flats into a single house) at 5% VAT
- Consideration– a thing done or given in exchange for something else = a supply. Usually quantified in money, but in some cases non-monetary consideration
- Construction of new dwellings – a zero rated supply
- Contract – legal document detailing the agreement of terms between the vendor and buyer
- Contractor – entity responsible for building works
- Conversion–work on a non-residential building which results in a property designed as a dwelling(s) being created
- Covenants – rules governing the property in its title deeds or lease. May impact the definition of dwellings
- Curtilage– either a garden, or an area surrounding a building which is deemed to be part of the property
- Designed as a dwelling– a property initially designed for residential use, regardless of any subsequent alternative use
- Dilapidations – items that have been damaged during a tenancy for which the tenant is responsible for the cost of repair or replacement. Usually VAT free
- DIY Housebuilders’ Scheme – a scheme which ‘self-builders’ to recover VAT on a new build dwelling or conversion. Details here
- Domestic Reverse Charge – a self-supply charge details here
- Dwelling– a building deemed to be residential
- Empty house – if, in the ten years before work on a dwelling starts, it has not been lived in, the work may be subject to 5% rather than 20% VAT
- Exempt– a supply that is VAT free. It usually results in attributable input tax falling to be irrecoverable
- Facade– a wall (or two walls on a corner plot) which may be retained without affecting the zero rating of a new dwelling construction
- Grant– a supply of an interest in land
- Holiday home – the sale or long lease of a holiday home cannot be zero-rated even if it is designed as a dwelling
- Housing Association – a non-profit organisation which rents residential property to people on low incomes or with particular needs
- In the course of construction– meaningful works that have occurred in relation to the construction of a building (but prior to its completion)
- Incorporated goods – goods sold with a new dwelling which are zero rated and to which the input tax block does not apply. See white goods
- Input tax– VAT incurred on expenditure associated with property
- Interest in, or right over, land– the right to access to and use of, land. Usually via ownership or lease
- Lease – legal document governing the occupation by the tenant of a premises for a specific length of time
- Licence to occupy– a permission to use land that does not amount to a tenancy
- Live-work units – a property that combines a dwelling and commercial or industrial working space. Usually subject to apportionment
- Major interest–a supply of a freehold interest or a lease exceeding 21 years
- Multiple occupancy dwelling – a dwelling which is designed for occupation by persons not forming a single household
- New building–a commercial building less than three years old the sale of which is mandatorily standard
- Non-residential– a commercial building which is not used as a dwelling
- Open market value – likely sale price with a willing seller and buyer, with a reasonable period of marketing and no special factors affecting the property
- Option to tax (OTT) – act of changing the exempt sale or letting of a commercial into a taxable supply. The purpose is to either; recover input tax or avoid input tax being charged. Details here
- OTT disapplication– the legal removal of a vendor’s option to tax
- OTT not applicable – the OTT does not apply to residential buildings (so VAT can never apply to dwellings)
- OTT revocation– the ability to revoke an option to tax after six months or twenty years
- Partial exemption– a calculation to attribute input tax to exempt and taxable. Generally, VAT incurred in respect of exempt supplies is irrecoverable
- Person constructing – a developer, contractor or sub-contractor who constructs a building
- Premium – upfront payment for a supply of property
- Relevant Charitable Purpose (RCP)–the use by a charity for non-business purposes or for use as a village hall or similar
- Relevant Residential Purpose (RRP)– dwelling used for certain defined residential purposes, eg; children’s home, a hospice or student accommodation
- Reverse surrender– a tenant surrenders an onerous lease to the landlord and makes a payment to surrender
- Share of freehold – where the freehold of the property is owned by a company and the shareholders are the owners of the property
- Single household dwelling– a building designed for occupation by a single household
- Snagging – the correction of building faults. Usually follows the VAT liability of the original work
- Stamp Duty Land Tax (SDLT) – tax paid by a purchaser of a property. SDLT is increased if the sale of a commercial property is the subject of an option to tax
- Substantial reconstruction– certain significant works to a listed building
- Surrender– a tenant surrenders the lease to the landlord in return for payment
- Taxable supply– a supply subject to VAT at the standard, reduced or zero-rate
- Use as a dwelling – a building which was designed or adapted for use as someone’s home and is so used
- Vendor – entity selling a property
- Transfer of a Going Concern (TOGC) – the VAT free sale of the assets of a business as a going concern. This may include a tenanted property
- Zero-rated– a taxable supply subject to VAT at a rate of 0%
We strongly recommend that advice is obtained if any property transaction is being undertaken.
Details of our land and property services may be found here.
VAT: Updated guidance for new charity buildings
Charities
HMRC have updated its Guidance on VAT refunds for constructing a new charity building. It provides information on when a charity can claim a VAT refund using the DIY housebuilders scheme if it is constructing a new charity building for a charitable or relevant residential purpose.
Meanings
Relevant charitable purpose
A relevant charitable purpose building is used by a charity for non-business purposes.
For VAT purposes, activities that do not make a profit, or activities where any profit is only used to further the aims and objectives of the charity, can still be classed as business activities.
Relevant residential purpose
A relevant residential purpose building is used by a charity for non-business purposes. It is:
- a home or other institution providing residential accommodation for children
- a home or other institution providing residential accommodation with personal care for old age people, disablement, past or present dependence on alcohol or drugs or past or present mental disorder
- a hospice (as long as that hospice provides some residential accommodation, such as beds for patients)
- residential accommodation for students or school pupils
- residential accommodation for members of any of the armed forces
- a monastery, nunnery or similar establishment
- an institution which is the sole or main residence of at least 90 per cent of its residents
VAT: Overages – new guidance
HMRC has issued new internal guidance on overages.
Land and property transactions are often complex and high value for VAT purposes. One area which we have been increasingly involved with is overages.
What is an overage?
An overage is an agreement whereby a purchaser of land agrees to pay the vendor an additional sum of money, in addition to the purchase price, following the occurrence of a future specified event that enhances the value of the land. This entitles the seller to a proportion of the enhanced value following the initial sale. Overages may also be called clawbacks, or uplifts.
Overages are popular with landowners who sell with the benefit of development potential and with buyers who may be able to purchase land at an initial low price with a condition that further payment will be made contingent on land increasing in value in the future – this may be as a result, of, say, obtaining Planning Permission.
VAT Treatment
HMRC consider that the VAT liability of overage should be considered separately from the VAT liability of the initial sale. HMRC’s policy is that the VAT liability of an overage payment will generally be determined at the time of supply of the overage payment, rather than when the original land sale completed.
Overage payments where an option to tax is made after the initial grant – where an option to tax is made after the property has been sold to the buyer, any subsequent overage payment may be liable to the standard rate of VAT as a result of VAT Act 1994, Schedule 10, Paragraph 31 (unless the option to tax has been disapplied, eg; where a property intended for use as a dwelling). In such situations, where the overage payment is made after the dwellings are constructed on the land, and the original grant was taxable by virtue of the option to tax, the option can be excluded in relation to the overage payment.
New commercial buildings – overage payments:
- Where there is a grant of a freehold interest in a new (or incomplete) commercial building, the overage will always be taxable at the standard rate – it does not become exempt simply because three years or more have elapsed since the building was completed. This will remain the position if the overage falls due after the designation ‘new’ has expired after three years.
- Where there has been a freehold sale of bare, un-opted land subject to an overage obligation, the liability of the overage payment will remain exempt even if a new commercial building is constructed on the site before the overage is paid.
This means that the VAT liability of the overage is determined by reference to the description of the land at the time that the original sale of the land takes place.
More on overages here. This covers HMRC’s previous views on overages .
Common VAT mistakes
VAT basics
None of us are perfect, and any business can make mistakes with VAT despite all intentions to take reasonable care. So what are the most common errors? Here’s a list of pitfalls to avoid:
Wrong rate of output tax charged
- The default position is that a supply is standard rated unless it is specifically reduced rated, zero-rated, exempt or outside the scope of UK VAT
Land and property transactions
- Misunderstanding the correct VAT treatment of a land and property transactions
- Not recognising VAT issues
- Issues with the Option To Tax
- TOGC issues
- A guide to triggerpoints here
Cross-border issues
- Failing to meet the requirements to zero-rate exports
- Incorrect import procedures
- Ignoring the reverse charge
Inter-company charges
- Misunderstanding the VAT treatment of management charges
Partial exemption
- Not recognising partial exemption
- Using an inappropriate method
- Failing to carry out the annual adjustment
- Failing to make Capital Goods Scheme adjustments
Business entertainment
- Different rules apply to the recovery of input tax on entertaining depending on the type of recipient, eg: clients, contacts, staff, partners and directors depending on the circumstances
Registration
- Late registration
- Exception from registration
- Misunderstanding pre-registration issues
- Failing to appreciate voluntary registration
- Deregistration issues
VAT groups
- Failing to VAT group when beneficial or failing to disband
- Recovery of input tax
- Timing of transactions
- Partial exemption issues
Tax points (Time Of Supply)
- Failing to recognise a tax point for output tax
- Incorrect treatment of deposits
- Incorrect treatment of forfeit deposits
- Recovery of input tax at incorrect time
Bad Debt Relief issues
- Failing to claim Bad Debt Relief
- Failing to repay a claim to HMRC when payment from customer is received
- Failing to repay input tax when a supplier is not paid (after six months)
Overseas issues
- Not recognising indirect tax obligations outside GB
- Not recovering VAT incurred overseas
- Place of supply misunderstandings
Claiming input tax without the correct documentation
- A guide to alternative evidence here
Recovering irreclaimable input tax
- A guide to what VAT is not claimable here
Return errors
- A box-by-box guide here
Business promotion schemes
- Incorrect treatment of vouchers, gifts and discounts
Composite or separate supplies
- Treating a composite supply as individual supplies, or vice-versa
Changes to a business
- Selling new products, acquisitions, share sales, disposals, re-structuring, and ceasing to trade can all have a VAT impact and this can be missed
Fuel and motoring costs
- Not applying Road Fuel Scale Charges correctly
- Incorrect input tax recovery on vehicle purchases/leases/repairs etc
Special schemes
- Failure to use the most suitable alternative schemes for accounting for VAT
One-off transactions
- Failing to recognise VAT issues of unusual or one-off transactions
Non-business (NB) and charitable activities
- Failure to recognise NB activities
- Failure to restrict input tax in connection with NB activities
Errors can lead to draconian penalties, and ignorance is not a defence.
A guide to VAT triggerpoints here .
VAT: Holiday Lets – don’t get caught out
All residential letting is exempt… except holiday lets, which are standard rated at 20%. So, what is the difference? After all a house is a house, but the VAT treatment depends on how the property is advertised or “held out”.
If a property is held out for holiday accommodation, then the rental income is taxable.
What is holiday accommodation?
Holiday accommodation includes, but is not restricted to; any house, flat, chalet, villa, beach hut, tent, caravan or houseboat. Accommodation advertised or held out as suitable for holiday or leisure use is always treated as holiday accommodation. Also, increasingly, it is common for farms and estates to have cottages and converted barns within their grounds, which are exploited as furnished holiday lets so this use must be recognised for VAT purposes. Residential accommodation that just happens to be situated at a holiday resort is not necessarily holiday accommodation.
This treats holiday lets the same way as hotels, inns and B&B were VAT applies, which is fair.
Off-season lettings
If holiday accommodation is let during off-season, it should be treated as exempt from VAT provided it is let as residential accommodation for more than 28 days and holiday trade in the area is clearly seasonal.
What does this mean?
If the letting business exceeds the VAT registration threshold, currently £90,000, it must register for VAT. This usually means that either the business would lose a sixth of its income to HMRC or its letting fees would increase by 20% – which is not usually an option in a particularly price sensitive market. The only upside to registration is that VAT incurred on costs relating to the letting (input tax) would be recoverable. This may be on expenditure such as; agents’ fees, maintenance, refurbishments, laundry, websites and advertising etc.
Agents
If a property owner provides a property to a holiday letting agent and the agent itself provides the letting directly to the end users, this does not avoid the standard rating, even if the agent pays a guaranteed rent to the freeholder. This can catch some property owners out.
Sale of the property
When the owner sells the property, although it may have been used for standard rated purposes, the sale is usually treated as exempt. However, zero rating may be available for the first sale or long lease if it is a new dwelling with no occupancy restrictions. The sale of a “pure” holiday property is likely to be standard rated if it is less than three years old. To add to the complexity, it is also possible that the sale may qualify as a VAT free Transfer Of A Going Concern (TOGC). These are important distinctions because they determine, not only if VAT is chargeable, but, if the sale is exempt, there is usually a clawback of input tax previously claimed, potentially visa the Capital Goods Scheme (CGS).
Overseas properties
A final point: please do not forget overseas property lets. My article here sets out the tax risks.
Summary
There are a lot of VAT pitfalls for a business providing holiday lettings. But for a single site business, unless the property is large or very high end, it is likely that the income will below £90,000 and VAT can be ignored. However, it is important to monitor income and costs to establish whether:
- registration is required
- voluntary registration is beneficial (usually, but not exclusively, for major refurbishment projects).
VAT Notice 708: Buildings and construction updated
This Notice explains how to establish the appropriate VAT rate on building work and materials for contractors, sub-contractors and developers.
The construction of a new building and work to an existing building is normally standard rated. However, there are exceptions to this, inter alia:
- construction of new qualifying dwellings and communal residential buildings, and certain new buildings used by charities ― zero-rated
- conversion for a housing association of a non-residential building into a qualifying dwelling or communal residential building ― zero-rated
- alterations to suit the condition of people with disabilities ― zero-rated
- first time gas and electricity connections ― zero-rated
- conversion of a non-residential building into a qualifying dwelling or communal residential building ― reduced rate of VAT 5%
- renovation or alteration of empty residential premises ― reduced rate of VAT 5%
- installation of energy saving materials, grant funded heating system measures and qualifying security goods ― reduced rate of VAT 5%
- installation of mobility aids for the elderly for use in domestic accommodation ― reduced rate of VAT 5%
(These are just some examples; other works may also qualify for zero or reduced rating)
Amendments
Paragraph 7 (re: the conversion of premises to a different residential use) on reduced rated work has been amended at para 7.6 as there was uncertainty over the previous drafting.
Paragraph 8.4 has been revised to more accurately reflect the rules on the installation of building materials which are reduce rated.
VAT Planning: design and build
Planning
The construction of a new house, and the materials used by the contractor to build it, are zero-rated. However, architect and other building professional fees, eg; surveyors, supervisors, engineers, project or construction management and consultants, are always standard rated; even in respect of a new build.
This will represent an absolute VAT cost to:
- individuals
- entities which will rent the house(s) after completion
- housing associations (in some circumstances)
- certain entities which are not in business
- any entity which will use the building(s) for other exempt purposes
- entities which do not sell the house(s) – so onward zero-rating is not possible
- any entity which cannot recover all of its input tax for various reasons
Aims
If it is not possible to structure matters so that these fees can be recovered (there are a number ways to do this, but not all will be available to all parties) then advisers need to consider ways to remove the VAT charge – this may also be preferable for cashflow purposes even if full input tax recovery is possible.
VAT Planning
Design and build – the steps
- the housebuilder creates a separately VAT registered design and build company (newco)
- newco purchases the professional services and construction services and incurs the VAT on these (the construction element is zero-rated)
- these supplies are incorporated into a single onward supply of zero-rated design and build services to the housebuilder (a bundle) – the professional services are a cost component of the construction
- zero rating applies to the supply to the housebuilder as the predominant supply of the bundle is the construction of new dwellings
- newco recovers the input tax incurred on professional fees etc, as it relates to an onward taxable supply
- newco is in a repayment position and HMRC refunds the VAT incurred on the costs – often after a pre-cred query
It is also possible to use an independent design and build company, or engage a contractor to carry out both the design and construction elements of the project with a similar result.
Considerations
It is important to implement the planning correctly. This means that appropriate contracts must be in place, the operation is carried out on sound business principles (actual supplies are made and it is not simply the moving of money).
Arrangements
In order to evidence the proper commerciality of the structure, it is important to bear in mind that:
- appropriate contracts are in place
- proper invoicing is required
- the arrangements are at arm’s length
- a profit for newco would emphasise the commercial aspect
- all parties’ accounts reflect the transactions
- newco combines all of its costs (including overheads/admin etc) and supplies them to the housebuilder as part of a single package of zero-rated design and build services
- newco acts as principal and not agent (that the professional services are not disbursements)
- the newco and the housebuilder are not in the same VAT group
- care should be taken if loans are required (they may compromise arm’s length and genuine commercial contentions)
HMRC’s view
In HMRC’s Internal Guidance Manual VCONST02720 it states that:
“Zero-rating the construction of buildings: services excluded from zero rating: design and build
Architectural or design services supplied as part of a design and build contract can be treated as part of the zero-rated supply of construction services.
A typical design and build contract will require the contractor to complete the design for the works and complete the construction of the works.
In such circumstances HM Revenue & Customs (HMRC) sees the design element as a cost component of the construction and not as a separate supply of architectural services which would be liable to VAT at the standard rate”.
Consequently, this planning is recognised and accepted by HMRC, however, it is important that it is applied effectively so it is difficult for HMRC to challenge.
VAT: Construction Services Reverse Charge – New HMRC Manual
The Construction Reverse Charge (RC) background details here.
HMRC has recently published its VAT Reverse Charge for Building and Construction Services Manual.
It includes:
- how it works
- which services are covered
- the supplies of materials
- the supplies of labour and/or staff
- who needs to apply it
- practical issues such as invoicing and adjustments to consideration
- compliance issues
The contents of the new manual are:
- VATREVCON05000 – Data Protection
- VATREVCON10000 – Introduction: contents
- VATREVCON20000 – Scope of the construction reverse charge: contents
- VATREVCON30000 – How the construction reverse charge works: contents
- VATREVCON40000 – Compliance issues: contents
VAT Domestic Reverse Charge procedure Notice updated
HMRC has updated – VAT Notice 735: Domestic reverse charge procedure
The Notice sets out how the Domestic Reverse Charge (DRC) makes supplies of standard or reduced rated construction services between construction or building businesses subject to the charge. This means that the recipient of the supply will be liable to account for VAT due, instead of the supplier. Consequently, the customer in the construction industry receiving the supply of construction services will be required to pay the VAT directly to HMRC rather than paying it to the supplier. It will be able to reclaim this VAT subject to the normal VAT rules. The DRC will apply throughout the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services (a so-called end user).
The supplies to which the DRC applies are set out here
The update includes information on recipients of DRC supplies that are not VAT registered. Broadly; if a business buys specified goods or services, it may make it liable to VAT registered on the strength of the value of the DRC.