HMRC has issued a call for evidence in respect of land exemption. HMRC acknowledges the complexity of the existing VAT rules on land and property and would like to hear views from businesses on the application of the current rules, and whether these rules could be simplified.
The application of VAT on land and property transactions is complicated. A range of different rates and exemptions can apply depending on the facts and circumstances of individual situations and the precise treatment of a transaction or project is often open to interpretation.
Complexity
The paper identifies a number of reasons why this area is extremely complicated:
- over the years the amount of legislation has increased, and the land VAT exemption now contains fifteen exceptions and twenty-six sets of notes
- some businesses can be required to make several separate decisions before the VAT liability of their supply can be established. Eg; once a business has established that it is supplying land (not always straightforward) it then has to consider whether that supply falls within one of the exceptions to the exemption. If it does fall within one of the exceptions, it then has to consider a number of conditions to establish whether it is excluded from that exception
- businesses may spend a disproportionate amount of time and money to establish the correct liability of their land supplies. This can also cause additional burdens for HMRC to assure compliance of these businesses
- the development of new markets and services that did not exist when VAT was introduced
- the impact of precedent case law (both UK and EU)
- the uncertainty of establishing when an exempt supply of land becomes a taxable supply of facilities
The Option to Tax
The option to tax legislation enables a business to tax some supplies of land that would otherwise be treated as exempt from VAT. The usual rationale behind making such a choice is to be able to recover the VAT incurred on costs and overheads of a business, or to meet the conditions of a Transfer of a Going Concern (TOGC).
Suggestions
The document then suggests some ideas for simplification:
- removing the ability to opt and making all relevant transactions exempt
- removing the option to tax and making all land and property taxable at a reduced rate
- making all commercial land and property taxable at the standard rate with an option to exempt
The first suggestion would result in many businesses incurring irrecoverable input tax which would be a direct cost, so this appears very unattractive.
The second seems a better option, but would bring new housing into the VAT net and I doubt that this would play out very well with the public.
The final suggestion would certainly simplify matters but would add VAT costs to entities which cannot recover any/all input tax, eg; charities, financial service providers, insurance companies, education bodies, health and welfare organisations and cultural services.
The document states that “The Government wants UK businesses to operate in the best possible environment and remain both productive and competitive”.
It remains to be seen whether the suggestions above (or other proposals put forward) will achieve this, but removing choices for a business (regardless of whether simplification is actually realised) is rarely a good idea and I wonder if simplification could be reached in other ways. If you have an interest in this area, please respond to this call as input is valuable for all parties.
Responses should be sent by 3 August 2021 by email to landsimplification@hmrc.gov.uk.