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Www.bakertilly.co.uk VAT on Property Transactions.

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Presentation on theme: "Www.bakertilly.co.uk VAT on Property Transactions."— Presentation transcript:

1 VAT on Property Transactions

2 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 2

3 VAT Rate’s Applicable on Property Transactions 3 VAT Exempt 20% or Exempt 20% 0% 5% Exempt or 20% 0% & 20%

4 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! 4

5 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 5

6 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 6

7 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 7

8 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) 8

9 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 9

10 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 10

11 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 dwellingReduced Rated  special residential conversion −Live work units / New Build part commercial and part residential = subject to apportionment 20% / 0% 11

12 Option to Tax (OTT) −How specific will an OTT be? −Demolitions / new buildings −Extensions −Linked buildings −Exclusions for new buildings −Revoking an OTT 12

13 Disapplication of Option to Tax (OTT) −Sale of land to Housing Association Costs −Land £2m + VAT £400k −Prof fees £200k plus VAT £40k Costs Land £2.4m −Prof fees £240k −“Golden Brick” Solution 13 Housing Association £4m + VAT Profit £1.8m Housing Association £4m no VAT Certificate disapplies OTT Profit £1.36m

14 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 14

15 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 15

16 Option to Tax (OTT) Disapplication of OTT 16 Dev Co Bank Co 1 2 £10m 3 50 year lease 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.

17 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 17

18 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 18

19 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) 19 CGS Adjustment = Exempt usage is 33% in 2014 Initial VAT reclaim £175k ÷ 10 = £17.5K x 33% = £5775 clawback

20 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 20 −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

21 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 21

22 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 22

23 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

24 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! 24

25 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 25

26 VAT Building Materials and Fixtures Specific exclusions: −Finished or prefabricated furniture −Electrical / gas appliances −Carpets or carpeting material −Luxury fittings 26

27 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 27

28 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 28

29 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) 29

30 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’ Transfer of Going Concern (TOGC) 30

31 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 Not a TOGC Actively marketed but not let (yet) Freehold owned and a lease granted Head lease owned and a sub- lease 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 31

32 Property Development Purchase Freehold Leasehold TOGC Option to tax & disapplication Barter 32

33 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 33

34 Property & VAT Structured Approach What are you buying? What will you do with it? What are you building? For example: Bare LandNew DwellingsShort Lets Exempt or VAT if opted Zero ratedExempt Office BlockConvert to FlatsLong leases Exempt or VAT if opted Reduced rateZero rate VAT position Will we incur VAT? Can we recover VAT? 34

35 Nice & straightforward Any questions? 35

36 Contacts 36 John Forth Director Richard Urron Associate Director T: +44 (0) T: +44 (0) E: 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

37 37 © 2014 Baker Tilly UK Group LLP, all rights reserved Baker Tilly Tax and Advisory Services LLP, Baker Tilly UK Audit LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are 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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