RE WS1 – Tasking Instructions TIFF LIAO
Chapter 6.2.1 VAT Page 66
SUMMARY
A liability to CGT may arise on the disposal of interest in land.
Gains made on the disposal of a principal private dwelling house are exempt from CGT.
The sale of a residential property by a private individual will NOT give rise to VAT.
The sale of a residential property by a developer will be zero rated for VAT purposes and so no VAT will be paid by the buyer.
The sale of a new commercial building is standard rated for VAT purposes.
The sale of an old commercial building is exempt, but subject to the option to tax.
If VAT is (or could become) chargeable on a property transaction, the contract MUST contain provisions to deal with it.
Stamp duty land tax is charged on freehold and leasehold property transactions at different rates depending on the type of
property, the purchase price and (in the case of leasehold property) rent.
INTRODUCTION
VAT is chargeable in respect of a supply of goods or services made in the course of a business.
Supplies can be:
(a) Exempt – not subject to tax
(b) Zero-rated – subject to vat to 0%
(c) Standard-rated – current standard rate of 20%
Depending upon the circumstance.
VAT paid by a business on supplies made it to (‘input tax’) CAN be recovered from HMRC, provided that it was incurred in making
taxable supplies.
The VAT charged by a business on supplies it makes (‘output tax’) has to be accounted for to HMRC. In practice, the input tax incurred
in making those supplies is deducted from the output tax and only the balance is paid over to HMRC. Deducting the input tax is
colloquially referred to as ‘recovering the VAT’.
Value added tax affects property transactions as follows:
(i) Sale of green field site; exempt, but subject to option to tax
(a) Residential (ii) Construction and civil engineering works; zero rated
Properties (iii) Legal and other professional services; standard-rated,
(iv) Sale or lease of a new house; zero rated
(i) Sale of a green field site: exempt, but subject to option to tax
(b) Commercial (ii) Construction and civil engineering services; standard-rated
Properties (iii) Legal and other professional fees: standard-rated
(iv) Sale of a new freehold buildings’ standard-rated
(v) Sale of an old freehold building; exempt, but subject to option to tax; AND
(vi) Grant or assignment of a lease; exempt, but subject to option to tax
THE OPTION TO TAX
When an exempt supply is made, any input tax incurred in connection with that supply CANNOT be recovered from HMRC.
The purpose of the option to tax is to enable an individual to convert an exempt supply into a taxable one, enabling them to recover
any input tax incurred.
Thus, a developer who has incurred VAT on constructing or refurbishing a property may opt to charge VAT on its disposal so that the
VAT incurred getting it ready for sale can be recovered.
The details of how to effect this option (sometimes confusingly referred to as an ‘election to waive exemption’) are outside the scope of
this chapter. However, notification of the option to HMRC is necessary for it to be effective.
VAT AND RESIDENTIAL PROPERTY
In the case of residential property, the impact of VAT is relatively uncomplicated.
The sale or lease of a new house by the person constructing it is zero-rated.
The subsequent sale of a dwelling (either freehold or leasehold) by a private individual will NOT be made in the course of a
business.
The sale of a buy-to-let property is an exempt supply.
= So in none of these cases will the seller be charging the buyer VAT in addition to the purchase price.
In the case of residential development, the purchase of land by a developer will be an exempt supply, UNLESS the seller has opted to
charge tax .
The construction work will be zero-rated and so no input tax will be incurred on this, but input tax will be paid on the professional fees.
The sale of the houses will be zero-rated and, as this is a taxable supply (albeit at 0%), the developer will be able to recover the input
tax incurred from HMRC.
1
TIFF LIAO
, RE WS1 – Tasking Instructions TIFF LIAO
Chapter 6.2.1 VAT Page 66
VAT AND COMMERCIAL PROPERTY
The VAT implications here are much more extensive.
The sale of a ‘new’ freehold commercial building = standard-rated
- will enable a developer to recover the potentially significant amounts of input tax incurred in developing the site.
- A ‘new’ building = one completed within the 3 years prior to the sale.
- The input tax incurred may well be substantial as the construction and other works will be standard-rated.
- Although the purchase of land in the first place will prima facie have been an exempt supply, the seller to the developer might have
opted to charge tax.
The freehold sale of a commercial property (which is more than 3 years old and the grant of a lease of commercial property
(whatever the age of the building) = exempt, but subject to the option to tax.
- The only point in the seller/landlord opting to tax is to enable them to recover any input tax incurred.
- If none has been incurred, they are unlikely to so opt because this will make the property unattractive to VAT-sensitive
buyers/tenants
- However, VAT may have been incurred in carrying out repair and refurbishment works on the building, and as this CANNOT be
recovered on making an exempt supply, the seller/landlord can opt to tax and recover their input tax by setting it off against the
output tax being charged to the buyer/tenant.
Where the property is a ‘new’ freehold or ‘old’ property where the option to tax has been exercised (so that the standard rate
would normally apply)…
- if the property is let and the buyer intends to continue the letting business = may be possible to treat the sale of the property as
a transfer of a business as a going concern (TOGC).
- If the transaction is a TOGC, no VAT will be chargeable on the transaction.
- The seller and buyer must BOTH be VAT registered, and the buyer must opt to tax the property and notify HMRC prior to the tax
point for the transaction.
- The detailed provisions concerning TOGCs are outside the scope of this book.
VAT- SENSITIVE BUYERS/TENANTS
Potential buyers and tenants who make mainly standard-rated or zero-rated supplies in the course of their businesses (eg, retail
foodstores or solicitors) will NOT be adversely affected by a charge to VAT on the purchase price or rent, since they will be able to
recover the VAT.
They will do this either by:
(a) offsetting the input tax AGAINST their output tax (in the case of those making standard-rated supplies) or
(b) by reclaiming it from HMRC (in the case of those making zero-rated supplies).
However, for those businesses that make only exempt supplies (eg, banks, building societies, insurance companies), any VAT they pay
on the purchase price or the rent will be irrecoverable.
o Such businesses may, for example, be reluctant to purchase ‘new’ freehold properties or take a lease of a property where the
landlord has opted to tax.
o Alternatively, they may seek to pay a reduced price or rent to compensate for the irrecoverable VAT.
2
TIFF LIAO
Chapter 6.2.1 VAT Page 66
SUMMARY
A liability to CGT may arise on the disposal of interest in land.
Gains made on the disposal of a principal private dwelling house are exempt from CGT.
The sale of a residential property by a private individual will NOT give rise to VAT.
The sale of a residential property by a developer will be zero rated for VAT purposes and so no VAT will be paid by the buyer.
The sale of a new commercial building is standard rated for VAT purposes.
The sale of an old commercial building is exempt, but subject to the option to tax.
If VAT is (or could become) chargeable on a property transaction, the contract MUST contain provisions to deal with it.
Stamp duty land tax is charged on freehold and leasehold property transactions at different rates depending on the type of
property, the purchase price and (in the case of leasehold property) rent.
INTRODUCTION
VAT is chargeable in respect of a supply of goods or services made in the course of a business.
Supplies can be:
(a) Exempt – not subject to tax
(b) Zero-rated – subject to vat to 0%
(c) Standard-rated – current standard rate of 20%
Depending upon the circumstance.
VAT paid by a business on supplies made it to (‘input tax’) CAN be recovered from HMRC, provided that it was incurred in making
taxable supplies.
The VAT charged by a business on supplies it makes (‘output tax’) has to be accounted for to HMRC. In practice, the input tax incurred
in making those supplies is deducted from the output tax and only the balance is paid over to HMRC. Deducting the input tax is
colloquially referred to as ‘recovering the VAT’.
Value added tax affects property transactions as follows:
(i) Sale of green field site; exempt, but subject to option to tax
(a) Residential (ii) Construction and civil engineering works; zero rated
Properties (iii) Legal and other professional services; standard-rated,
(iv) Sale or lease of a new house; zero rated
(i) Sale of a green field site: exempt, but subject to option to tax
(b) Commercial (ii) Construction and civil engineering services; standard-rated
Properties (iii) Legal and other professional fees: standard-rated
(iv) Sale of a new freehold buildings’ standard-rated
(v) Sale of an old freehold building; exempt, but subject to option to tax; AND
(vi) Grant or assignment of a lease; exempt, but subject to option to tax
THE OPTION TO TAX
When an exempt supply is made, any input tax incurred in connection with that supply CANNOT be recovered from HMRC.
The purpose of the option to tax is to enable an individual to convert an exempt supply into a taxable one, enabling them to recover
any input tax incurred.
Thus, a developer who has incurred VAT on constructing or refurbishing a property may opt to charge VAT on its disposal so that the
VAT incurred getting it ready for sale can be recovered.
The details of how to effect this option (sometimes confusingly referred to as an ‘election to waive exemption’) are outside the scope of
this chapter. However, notification of the option to HMRC is necessary for it to be effective.
VAT AND RESIDENTIAL PROPERTY
In the case of residential property, the impact of VAT is relatively uncomplicated.
The sale or lease of a new house by the person constructing it is zero-rated.
The subsequent sale of a dwelling (either freehold or leasehold) by a private individual will NOT be made in the course of a
business.
The sale of a buy-to-let property is an exempt supply.
= So in none of these cases will the seller be charging the buyer VAT in addition to the purchase price.
In the case of residential development, the purchase of land by a developer will be an exempt supply, UNLESS the seller has opted to
charge tax .
The construction work will be zero-rated and so no input tax will be incurred on this, but input tax will be paid on the professional fees.
The sale of the houses will be zero-rated and, as this is a taxable supply (albeit at 0%), the developer will be able to recover the input
tax incurred from HMRC.
1
TIFF LIAO
, RE WS1 – Tasking Instructions TIFF LIAO
Chapter 6.2.1 VAT Page 66
VAT AND COMMERCIAL PROPERTY
The VAT implications here are much more extensive.
The sale of a ‘new’ freehold commercial building = standard-rated
- will enable a developer to recover the potentially significant amounts of input tax incurred in developing the site.
- A ‘new’ building = one completed within the 3 years prior to the sale.
- The input tax incurred may well be substantial as the construction and other works will be standard-rated.
- Although the purchase of land in the first place will prima facie have been an exempt supply, the seller to the developer might have
opted to charge tax.
The freehold sale of a commercial property (which is more than 3 years old and the grant of a lease of commercial property
(whatever the age of the building) = exempt, but subject to the option to tax.
- The only point in the seller/landlord opting to tax is to enable them to recover any input tax incurred.
- If none has been incurred, they are unlikely to so opt because this will make the property unattractive to VAT-sensitive
buyers/tenants
- However, VAT may have been incurred in carrying out repair and refurbishment works on the building, and as this CANNOT be
recovered on making an exempt supply, the seller/landlord can opt to tax and recover their input tax by setting it off against the
output tax being charged to the buyer/tenant.
Where the property is a ‘new’ freehold or ‘old’ property where the option to tax has been exercised (so that the standard rate
would normally apply)…
- if the property is let and the buyer intends to continue the letting business = may be possible to treat the sale of the property as
a transfer of a business as a going concern (TOGC).
- If the transaction is a TOGC, no VAT will be chargeable on the transaction.
- The seller and buyer must BOTH be VAT registered, and the buyer must opt to tax the property and notify HMRC prior to the tax
point for the transaction.
- The detailed provisions concerning TOGCs are outside the scope of this book.
VAT- SENSITIVE BUYERS/TENANTS
Potential buyers and tenants who make mainly standard-rated or zero-rated supplies in the course of their businesses (eg, retail
foodstores or solicitors) will NOT be adversely affected by a charge to VAT on the purchase price or rent, since they will be able to
recover the VAT.
They will do this either by:
(a) offsetting the input tax AGAINST their output tax (in the case of those making standard-rated supplies) or
(b) by reclaiming it from HMRC (in the case of those making zero-rated supplies).
However, for those businesses that make only exempt supplies (eg, banks, building societies, insurance companies), any VAT they pay
on the purchase price or the rent will be irrecoverable.
o Such businesses may, for example, be reluctant to purchase ‘new’ freehold properties or take a lease of a property where the
landlord has opted to tax.
o Alternatively, they may seek to pay a reduced price or rent to compensate for the irrecoverable VAT.
2
TIFF LIAO
