Category Archives: Land & Property

VAT: Property – The Option To Tax

By Marcus Ward 13 March 2019

Opting To Tax commercial property

Opting to tax provides a unique situation in the VAT world. It is the only example of where a supplier can choose to add VAT to a supply….. or not.

What is an option to tax?

The sale or letting of a property is, in most cases, exempt (VAT free) by default. However, it is possible to apply the option to tax (OTT) to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. It should be noted that an OTT made in respect of a residential property is disregarded and consequently, the supply of residential properties is always exempt.

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken. Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20-year period (although there are circumstances where it may be revisited within six months of it being taken – see below). There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases, HMRC’s permission must usually be obtained before the option can be made.

What to consider

The important questions to be asked before a property transaction are:

Was VAT incurred on the purchase price?
Is the purchase with the benefit of an existing lease (will the tenant remain?) if so, it may be possible to treat the transaction as a VAT free TOGC (see below)
Is the property subject to the Capital Goods Scheme (CGS here)?
Is it intended to spend significant amounts on the property, eg; refurbishment?
What other costs will be incurred in respect of the property?
If renting the property out – will the lease granted be full tenant repairing?
Will the tenant or purchaser be in a position to recover any or all VAT charged on the rent/sale?

These are the basic questions to be addressed; further factors may need to be considered depending on the facts of a transaction.

Input tax recovery

Input tax relating to an exempt supply is usually irrecoverable. In fact, a business only making exempt supplies is unable to register for VAT. A guide to partial exemption here. So input tax incurred on, say; purchase, refurbishment, legal costs etc would be lost if a property was sold or rented on an exempt basis. In order to recover this tax, it must relate to a taxable supply. If an OTT is taken, the sale or rent of the property will be standard rated which represents a taxable supply. VAT on supply = input tax claim.

Two-part process

The OTT is a two-part process.

The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
The second part is to formally notify HMRC. If the OTT is straightforward the form on which this is done is a VAT1614A. Here. In some cases, it is necessary to obtain HMRC’s permission in which case separate forms are required. HMRC guidance here – para 5.

There can be problems in cases where the OTT is taken, but not formally notified.

Timing

It is vital to ensure that an OTT is made at the correct time. Even one day late may affect the VAT treatment. Generally speaking, the OTT must be made before any use of the property, eg; sale or rent. Care should also be taken with deposits which can trigger a tax point before completion.

Disadvantages

As mentioned above (and bears repeating) the benefit of taking the OTT is the ability to recover input tax which would otherwise fall to be irrecoverable. However, there are a number of potential disadvantages.

opting a commercial property may reduce its marketability. It is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property. These entities may be; partly exempt business, those not VAT registered, or charities/NFP organisations.
the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be paid for up-front.
an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.

Transfer of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and always in cases of a TOGC or a possible TOGC. This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met. A TOGC is VAT free but any input tax incurred is recoverable, so this is usually a benefit for all parties.

Revoking an Option To Tax

The cooling off period – If an OTT has been made and the opter changes his/her mind within six months it can be revoked. This is as long as no tax has become chargeable on a supply of the land, that no TOGC has occurred, and the OTT has actually been notified to HMRC. There are additional considerations in certain cases, so these always need to be checked.
No interest has been held for more than six years – An OTT is revoked where the opter has not held an interest in the opted building for a continuous period of six years. The revocation is automatic, and no notification is required.
20 years – It is possible to revoke an OTT which was made more than 20 years ago. Certain conditions must be met, and advice should be taken on how such a revocation affects future input tax recovery.

Summary

Property transactions are high value and often complex. The cost of getting VAT wrong or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues. of course, if you get it wrong there are penalties to pay too. For these reasons, please seek VAT advice at an early stage of negotiations.

More on our land and property services here

VAT: New reverse charge for the construction industry

By Marcus Ward 4 February 2019

Further to my article which sets out the basis of these changes, I look further at the measures which will be introduced on 1 October 2019. Time is running out for businesses in the building and construction sector to understand the impact of the new rules and to make arrangements to implement the required changes. These will include:

cashflow implications
accounting procedures
processes
tax compliance
documentation
systems

Background

HMRC will introduce the Reverse Charge (RC) to combat Missing Trader Fraud (MTF). The rules avoid suppliers charging and being paid VAT but failing to declare or pay this over to the government. HMRC has identified the building trade as an area where there has been considerable tax leakage in the past. The UK has introduced similar measures in response to criminal threats for mobile telephones, emissions allowances, gas, electricity and electronic communications. A domestic reverse charge only applies to supplies between UK taxable persons therefore unless the customer is registered or liable to be registered for VAT it will not apply.

The RC will make supplies of standard or reduced rated construction services between construction or building businesses subject to the domestic RC, which 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 RC 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, see below).

The supplies to which the RC will apply are set out here

Further information on the RC in general, including invoicing requirements are to be found in VAT Notice 735

Technical

As a general rule, it is the supplier of goods or services who is required to account for VAT on those supplies. However, the VAT Act 1994, section 55A requires the recipient, not the supplier, to account for and pay tax on the supply of any goods and services which are of a description specified in an order made by the Treasury for that purpose.

The final version of the draft legislation has now been published. In addition HMRC have issued guidance notes which include a helpful flowchart.

Mixed supplies

If there is a RC element in a supply, then the whole supply will be subject to the RC. This is to make it simpler for both supplier and customer and to avoid the need to apportion the supply.

End user

End users will usually be recipients who use the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.

VAT Returns

Suppliers

Suppliers applying the RC do not enter a figure for output tax in box 1 of the VAT Return, but should enter the value of such sales in box 6.

Customers

Customers must enter the output tax on purchases to which the RC applies in box 1 of the VAT Return, but must not enter the value of such purchases in box 6. They may reclaim the input tax on the RC purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

Implementation

HMRC state that it understands the difficulties businesses may have in implementing the domestic RC and say it will apply a light touch in dealing with related errors that occur in the first six months after introduction.

Action

It is prudent to check whether you, or your clients’ businesses will be affected by these changes. If so, plans need to be put in place; whether as a supplier or recipient, to ensure that VAT is not charged incorrectly (supplier) and the RC is applied correctly (recipient). It is likely that output tax incorrectly shown on an invoice will be due to HMRC but will not be recoverable by the recipient and the omission of levying the RC will lead to penalties. It will also be helpful for smaller construction providers affected by the RC to examine the impact on their cashflow.

Please contact us if you have any queries or require further information.

VAT – A Christmas Tale

By Marcus Ward 17 December 2018

Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities. May I explain what I do and then you can write to me with your advice? If you think a face to face meeting would be better, I can be found in most decent sized department stores from mid-September to 24 December.

First of all, I am based in Greenland, but I do bring a stock of goods, mainly toys, to the UK and I distribute them. Am I making supplies in the UK?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

The toys are of course mainly for children and I wonder if zero rating might apply? I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it? My friend Rudolph has told me that there is a peculiar rule about gifts. He says that if I give them away regularly and they cost more than £150 I might have to account for VAT. Is that right?

My next question concerns barter transactions. Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return. If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks. Have I made a supply and what is the value please? My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me. Lots of children ask me for a ride on my airborne transport. I suppose I could manage to fit twelve passengers in. Does that mean my services are zero-rated? If I do this free of charge will I need to charge air passenger duty? Does it matter if I stay within the UK, or the EU? My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges? After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home. Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT. Please comment.

May I also ask about VAT registration? I know the limit is £85,000 per annum but do blips count? If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover. May I be excused from registration? If I do need to register should I use AnNOEL Accounting? At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing. I feel that my red clothing not only protects me from the extreme cold, but it is akin to a uniform and should be allowable. These are not clothes that I would choose to wear except for my fairly unusual job. If lady barristers can claim for black skirts, I think I should be able to claim for red dress. And what about my annual haircut? That costs a fortune. I only let my hair grow that long because it is expected of me.

Insurance worries me too. You know that I carry some very expensive goods on my transport. Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example. My parent company in Greenland takes out insurance there and they make a charge to me. If I am required to register for VAT in England will I need to apply the Reverse Charge? This seems to be a daft idea if I understand it correctly. Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

VAT – Land and property issues

By Marcus Ward 4 October 2018

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. These often result in large penalties and interest payments plus unwanted attentions from the VAT man. 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 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
apportionment of VAT rates
partial exemption
charity use
relevant residential use
the place of supply (POS) of services (which will be increasingly important after Brexit)
and even seemingly straightforward VAT registration

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

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 DIY Housebuilders’ Scheme Top 10 Tips

By Marcus Ward 14 September 2018

If you build your own home, there is a scheme available which permits you to recover certain VAT incurred on the construction. 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. As always with VAT, there are traps and deadlines, so here I have set out the Top Ten Tips.

An in-depth article on the DIY Housebuilders’ Scheme here

The following are bullet points to bear in mind if you are building your own house, or advising someone who is:

Understand HMRC definitions early in your planning

Budgeting plays an important part in any building project. Whether VAT you incur may be reclaimed is an important element. In order to establish this, it is essential that your plans meet the definitions for ‘new residential dwelling’ or ‘qualifying conversion’. This will help ensure that your planning application provides the best position for a successful claim. One point to bear in mind, and which I have found often produces difficulties, is the requirement for the development to be capable of separate (from an existing property) disposal.

Do I have to live in the property when complete?

You are permitted to build the property for another relative to live in. The key point is that it will become someone’s home and not sold or rented to a third party. Therefore, you can complete the build and obtain invoices in your name, even if the property is for your elderly mother to live in. However, it is not usually possible to claim on a granny annexe built in your garden (as above, they are usually not capable of being disposed of independently to the house).

Contractors

Despite the name of the scheme, you are able to use contractors to undertake the work for you. The only difference here will be the VAT rate on their services will vary depending on the nature of the works and materials provided.

What can you claim?

A valid claim can be made on any building materials you purchase and use on the build project. Also, services of conversion charged at the reduced rate can be recovered. However, input tax on professional services such as architect’s fees cannot be recovered.

Get the VAT rate right

It is crucial to receive goods and services at the correct rate of VAT. Services provided on a new construction of a new dwelling will qualify for the zero rate, whereas the reduced rate of 5% will apply for qualifying conversions. If your contractor has charged you 20% where the reduced rate should have been applied, HMRC refuse to refund the VAT and will advise you go back to your supplier to get the error corrected. This is sometimes a problem if your contractor has gone ‘bust’ in the meantime or becomes belligerent. Best to agree the correct VAT treatment up front.

Aid your cash flow

If you wish to purchase goods yourself, it will be beneficial to ask your contractor to buy the goods and combine the value of these with his services of construction. I this way, standard rated goods become zero rated in a new build. If you incur the VAT on goods, you will have to wait until the end of the project to claim it from HMRC.

Claim on time

The claim form must be submitted within three months of completion of the build, usually this is when the certificate of practical completion is issued, or the building is inhabited. although it can be earlier if the certificate is delayed.

Use the right form

HMRC publish the forms on their website

Using the correct forms will help avoid delays and errors.

Send everything Recorded Delivery

You are required to send original invoices with the claim. Therefore, take copies of all documents and send the claim by recorded delivery. Unfortunately, experience insists that documents are lost…

Seek Advice

If you are in any doubt, please contact me. Mistakes can be costly, and you only get one chance to make the claim. Oh, and don’t forget that this is VAT, so any errors in a claim may be liable to penalties.

VAT – Place of supply of professional services flowchart

By Marcus Ward 23 August 2018

A question I am often asked by my legal and accountant clients is “Do we charge VAT on our invoices?” The main issue with this general question is the place of supply (POS). Consequently, I have produced a simple flowchart which covers most situations and applies to all providers of professional services. Of course, this being VAT, there are always unusual or one-off queries, but this chart, with the notes should address the most common issues.

Place of supply Of Services Flowchart

POS services flowchart

Notes to flowchart

As always, nothing in VAT is as simple as it seems. So I hope the following notes are of assistance.

Place of belonging

If the services are supplied to an individual and received by him otherwise than for the purpose of any business carried on by him, he is treated as belonging in whatever country he has his “usual place of residence”.

If the services are in respect of an individual’s business interests, then more complex rules on the place of belonging may apply. The issue is usually where more than one “establishment” exists. In these cases, the rule is the place of belonging is the “establishment” at which, or for the purposes of which, the services are most directly used or to be used.

A guide to belonging here

Property rental in the UK

Property rental is treated as a business for VAT purposes. We must decide whether a rented property here creates a business establishment in the UK for the landlord. If a person has an establishment overseas and owns a property in the UK which it leases to tenants; the property does not in itself create a business establishment. However, if the entity has UK offices and staff or appoints a UK agency to carry on its business by managing the property, this creates a business establishment (place of belonging) in the UK. VAT Act 1994 s. 9 (5) (a). In these cases, the professional services would likely be UK to UK and be standard-rated.

Difference between business and non-business:

Services provided to an individual are likely to be non-business unless the services are linked to that individual’s business activities, eg; as a sole proprietor. Therefore, an individual’s tax return is, in most cases, likely to be in the recipient’s non-business capacity (although it may be prudent to identify why a UK tax return is required for a non-UK resident individual, ie; what UK activities have taken place and do these activities amount to a business or create a business establishment?)

This is an area that often gives rise to uncertainties and differences in interpretation (particularly when deciding which establishment has most directly used the services). It may be helpful to reproduce a specific example provided by HMRC:

Example

“A UK accountant supplies accountancy services to a UK incorporated company which has its business establishment abroad. However, the services are received in connection with the company’s UK tax obligations and therefore the UK fixed establishment, created by the registered office, receives the supply.”

As always, please contact us should you have any queries.

VAT Reliefs for Charities. A brief guide.

By Marcus Ward 16 July 2018

Charities and Not For Profit entities – a list of VAT reliefs

Unfortunately, there is no “general” rule that charities are relieved of the burden of VAT.

In fact, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually “neutral” and often becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.

There are only a relatively limited number of zero rated reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:

- Advertising services received by charities
- Purchase of qualifying goods for medical research, treatment or diagnosis
- New buildings constructed for residential or non-business charitable activities
- Self-contained annexes constructed for non-business charitable activities
- Building work to provide disabled access in certain circumstances
- Building work to provide washrooms and lavatories for disabled persons
- Supplies of certain equipment designed to provide relief for disabled or chronically sick persons

There are also special exemptions available for charities:

- Income from fundraising events
- Admissions to certain cultural events and premises
- Relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use
- Membership subscriptions to certain public interest bodies and philanthropic associations
- Sports facilities provided by non-profit making bodies

Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position.

The reduced VAT rate (5%) is also available for charities in certain circumstances:

- Gas and electricity in premises used for residential or non-business use by a charity;
- Renovation work on dwellings that have been unoccupied for over two years;
- Conversion work on dwellings to create new dwellings or change the number of dwellings in a building;
- Installation of mobility aids for persons aged over 60.

I strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid and that penalties are avoided. Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.

VAT: Construction industry – the new Reverse Charge

By Marcus Ward 11 June 2018

Builders will soon be required to charge themselves VAT.

HMRC has published an important new draft Statutory Instrument (SI) for technical consultation with a draft explanatory memorandum and draft tax information and impact note. The new rules are likely to be introduced in the autumn.

This sets out more details of the intended Reverse Charge (RC) for construction services. The draft legislation will make supplies of standard or reduced rated construction services between construction or businesses subject to the domestic RC, which means that the recipient of the supply will be liable to account for VAT due, instead of the supplier.

What supplies does the intended legislation cover?

The RC will apply to, inter alia:

construction, alteration, repair, extension, demolition or dismantling of buildings or structures
work on; walls, roadworks, electronic communications apparatus, docks and harbours, railways, pipe-lines, reservoirs, water-mains, wells, sewers, or industrial plant
installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
painting or decorating the internal or external surfaces of any building or structure
services which form an integral part of the services described above, including site clearance, earthmoving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

What is not covered?

These are some supplies which are not covered by the draft SI

drilling for, or extraction of, oil or natural gas
extraction of minerals and tunnelling or boring, or construction of underground works, for this purpose
manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
signwriting and erecting, installing and repairing signboards and advertisements
the installation of seating, blinds and shutters or the installation of security.

Please note that neither of the lists above are exhaustive.

Further details

The rules do not apply to supplies to the end user (consumer) eg; retailers and landlords, but rather to other construction businesses which then use them to make a further supply. There are no de minimis limits, but the RC will not apply to associated businesses.

Deadline

Before these new rues come into effect, HMRC have asked for comments before 20 July 2018.

Why the new rules?

Briefly, the SI is intended to avoid Missing Trader Fraud (MTF). The rules avoids suppliers charging and being paid VAT, but failing to declare or pay this over to the government. HMRC has identified the building trade as an area where there has been considerable tax leakage in the past.

Technical

Action

It is prudent to check whether you, or your clients’ businesses will be affected by the intended SI. If so, plans need to be put in place; whether as a supplier or recipient, to ensure that VAT is not charged incorrectly (supplier) and the RC is applied correctly (recipient). It is likely that output tax incorrectly shown on an invoice will be due to HMRC, but will not be recoverable by the recipient and the omission of levying the RC will lead to penalties.

Please contact us if you have any queries or require further information.

VAT: Wakefield College – Court of Appeal case

By Marcus Ward 1 June 2018

Latest from the courts

Further to my article on the Wakefield College case here the Court of Appeal (CA) has dismissed the college’s appeal that certain of its activities were non-business.

Background

The detailed background was set out in the above linked article, but to recap: In order for certain building works supplied to the appellant to be zero rated the resultant building has to be used for a “relevant charitable purpose” – that is; not for business purposes. This is the case even if there is a small amount of business activity in the building (as long as these can be shown to be insignificant; which is taken to be less than 5% of the activities in the whole building).

The issue

The issue here was whether the education provided by the college could be deemed non-business because, although the majority was grant funded, students were also required to make a contribution to their education. This is dependent upon whether the provision of courses by the college to students paying subsidised fees was, an economic activity carried on by it for the purposes of article 9 of the VAT Directive and consequently, a “business” within Note (6) of Group 5 in Schedule 8 to the VAT Act 1994.

The 1994 Act provides, at group 5 of schedule 8, for the zero-rating of various supplies made in the course of construction of certain buildings including:

“The supply in the course of construction of

(a) a building … intended solely for use for … a relevant charitable purpose…

of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity”.

Note (6) to group 5 provides:

“Use for a relevant charitable purpose means use by a charity… –

(a) otherwise than in the course or furtherance of a business.”

Decision

The CA found that the fact that the students paid for education (an exempt supply) meant that it was a business activity as consideration flowed in both directions. The proportion of the costs paid by the student amounted to between 25% and 30% of the total cost and could therefore not be deemed insignificant.

Commentary

It is worth reconsidering comments made by the judge in his summing up in the Upper Tribunal hearing.

“We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

So, although the result may be seen as “unfair” on the college, the strict letter of the VAT legislation does not provide the courts with any alternative but to impose a VAT charge on the construction works – a charge which the college will have to bear as it is unable to recover it as input tax due to the partial exemption rules.

This illustrates the complexity with both the concept of business/non-business and property and construction issues. When the two technical areas collide, as in this case, matters can get very complicated and proper advice is vital. This is especially important with charities as they benefit from very few VAT reliefs and it is important to ensure that those available are correctly taken advantage of.

VAT: Latest from the courts – option to tax, TOGC and deposits

By Marcus Ward 26 March 2018

Timing is everything

The First Tier Tribunal (FTT) case of Clark Hill Ltd (CHL) illustrates the detailed VAT considerations required when selling property. Not only are certain actions important, but so is timing. If a business is one day late taking certain actions, a VAT free sale may turn into one that costs 20% more than anticipated. That is a large amount to fund and will obviously negatively affect cashflow and increase SDLT for the buyer, and may result in penalties for the seller.

The case considered three notoriously difficult areas of VAT, namely: the option to tax, transfers of going concerns and deposits.

Background

CHL owned four commercial properties which had opted to tax. CHL sold the freehold of these properties with the benefit of the existing leases. As a starting point VAT would be due on the sale because of the option. However, the point at issue here was whether the conditions in Article 5 of the Value Added Tax (Special Provisions) Order 1995 were met so that the sale could be treated as a transfer of a business as a going concern (TOGC) and could therefore be treated as neither a supply of goods nor a supply of services for VAT purposes, ie; VAT free. The point applied to two of the four sales. The vendor initially charged VAT, but the purchasers considered that the TOGC provisions applied. CHL must have agreed and consequently did not charge VAT. HMRC disagreed with this approach and raised an assessment for output tax on the value of the sale.

TOGC

In order that a sale may qualify as a TOGC one of the conditions is that; the assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part. It is accepted that in a property business transfer, if the vendor has opted to tax, the purchaser must also have opted by the “relevant date”. If there is no option in place at that time HMRC do not regard it as “the same kind of business” and TOGC treatment does not apply.

Relevant date

If the purchaser opts to tax, but, say, one day after the relevant date, there can be no TOGC. The relevant date in these circumstances is the tax point. Details of tax points here

Basically put, a deposit can, in some circumstances, create a tax point. In this case, the purchaser had paid a deposit and, at some point before completion of the transfer of the property, the deposit had been received by the seller or the seller’s agent. The seller notified HMRC of the option to tax after a deposit had been received (in two of the relevant sales). The issue here then was whether a deposit created a tax point, or “relevant date” for the purposes of establishing whether the purchaser’s option to tax was in place by that date.

Decision

The judge decided that in respect of the two properties where the option to tax was not notified until after a deposit had been paid there could not be a TOGC (for completeness, for various other reasons, the other two sales could be treated as TOGCs) and VAT was due on the sale values. It was decided that the receipt of deposits in these cases created a relevant date.

Commentary

There is a distinction between opting to tax and notifying that option to HMRC which does not appear to have been argued here (there may be reasons for that). However, this case is a timely reminder that VAT must be considered on property transactions AND at the appropriate time. TOGC is an unique situation whereby the seller is reliant on the purchaser’s actions in order to apply the correct VAT treatment. This must be covered off in contracts, but even if it is, it could create significant complications and difficulties in obtaining the extra payment. It is also a reminder that VAT issues can arise when deposits are paid (in general) and/or in advance of an invoice being issued.

We recommend that VAT advice is always taken on property transactions ad at an early stage. Not only can situations similar to those in this case arise, but late consideration of VAT can often delay sales and can even cause such transactions to be aborted.