VAT LIABILITY AND THE IMPLICATIONS OF COMMERCIAL PROPERTY TRANSACTIONS ppt

INTRODUCTION VAT and property – a marriage made in Europe ...1 1 VAT GENERAL PRINCIPLES 3 The VAT regime ...4 VAT legislation ...4 Registration ...5 Rates of VAT ...5 Scope of VAT ...5 O

A SPECIALLY COMMISSIONED REPORT

VAT LIABILITY AND THE

IMPLICATIONS OF

COMMERCIAL PROPERTY TRANSACTIONS

T H O R O G O O D

P R O F E S S I O N A L

I N S I G H T S

T H O R O G O O D

P R O F E S S I O N A L

I N S I G H T S

A SPECIALLY COMMISSIONED REPORT

VAT LIABILITY AND THE

IMPLICATIONS OF

COMMERCIAL PROPERTY TRANSACTIONS

Thorogood Publishing Ltd 10-12 Rivington Street London EC2A 3DU.

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of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying, recording or otherwise, without the prior permission of the publisher.

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A CIP catalogue record for this Report is available from the British Library.

Other Thorogood

Professional Insights

Applying the Employment Act 2002

– Crucial Developments for

Employers and Employees

Audrey Williams

Commercial Contracts – Drafting

Techniques and Precedents

Robert Ribeiro

Damages and other Remedies for

Breach of Commercial Contracts

Robert Ribeiro

Technical Aspects of Business Leases

Malcolm Dowden

Tax Planning Opportunities for

Family Businesses in the New Regime

Christopher Jones

Trade Secrets of Successfully

Acquiring Unquoted Companies

Barrie Pearson

Special discounts for bulk quantities

of Thorogood books are available to

corporations, institutions, associations and

other organisations For more information

To my family and in memory of Peter, my dad and Joan, my mother in law.

The author

Tim Buss is a VAT director in the Guildford office of accountants and business

advisors PKF and specialises in VAT and property issues However, he advisesclients on all aspects of VAT Tim has represented clients at VAT tribunals includingSEH Holdings referred to in this book

Prior to joining PKF in 1989, Tim spent 16 years in H.M Customs & Excise(Customs) as a VAT inspector and later as a classroom trainer of new entrants.His departure from Customs coincided with the introduction of VAT on newcommercial buildings

Tim is an associate and council member of the Institute of Indirect Taxation and

in 2002 was appointed the Institute’s Director of Education This entails sibility for the Institute’s examinations

respon-Tim regularly writes on a range of VAT issues He lectures and presents workshopsfor a number of organizations including the Association of Accounting Techni-cians, Institute of International Accountants and IBC Global Conferences

INTRODUCTION

VAT and property – a marriage made in Europe 1

1 VAT GENERAL PRINCIPLES 3 The VAT regime 4

VAT legislation 4

Registration 5

Rates of VAT 5

Scope of VAT 5

Output tax 7

Input tax 7

Time of supply 8

2 VAT LIABILITY OF COMMERCIAL PROPERTY TRANSACTIONS 9 UK legislation 10

European legislation 10

Exceptions from exemption in the UK 12

Freehold sales of commercial buildings or civil engineering works 13

Definition of an RCP building 13

Gaming and fishing rights 14

Hotel accommodation 14

Holiday accommodation 15

Caravan and tent pitches or camping facilities 16

Parking facilities 16

Sports facilities 18

3 LAND AND LICENCE TO OCCUPY LAND 19

Definition of land 20

Buildings 20

Scope of the exemption for land and buildings 21

Immovable property 21

Licences to occupy 22

Licence to use facilities 23

Customs’ examples 24

4 OPTION TO VAT 26 Introduction 27

Why opt? 27

Commercial considerations 27

Interaction with stamp duty land tax 28

Option ineffective 28

Scope of an option to tax 29

Who can opt? 30

How is the option exercised? 32

Option to tax – national unit 33

Problems with notifications/acknowledgements 34

Adding VAT to rents 34

Informing tenants 35

Subsequent works 35

Is an option valid? 36

Permission to opt regime 37

Revocation of an option 41

5 VAT ON TRANSACTIONS RELATING TO LEASES 42 Introduction 43

Lease surrenders 43

Variation of the terms of a lease 44

Reverse premiums 44

Assignment of a lease 45

Dilapidation payments 46

Rent free periods 46

6 CALCULATING RECOVERABLE VAT IN THE PROPERTY SECTOR 47 Introduction 48

Partial exemption 48

Standard partial exemption method 49

Annual adjustment 49

Special methods 50

Partial exemption de minimis limits 51

VAT recovery – change of use 51

Abortive and speculative developments 52

Recovery of VAT prior to an option to tax 52

7 CAPITAL GOODS SCHEME 54 Why have a Capital Goods Scheme? 55

Application of the scheme 55

Additions to the scheme 56

Definition of a capital item 56

Where CGS does not apply 57

Initial VAT recovery 57

Value 58

Intervals 59

Example 60

CGS effect on other disposals 61

Record keeping 62

8 TRANSFERS OF GOING CONCERNS 64 Introduction 65

The UK legislation 65

Consequences of TOGC treatment 66

Seeking Customs confirmation 67

European dimension .68

Interaction between the TOGC and property rules 69

Relevant date 70

Customs’ views .71

TOGC benefits 71

A capital goods scheme issue 72

Recovery of VAT on costs of TOGC transactions 72

9 VAT AVOIDANCE 73 Introduction 74

Option for VAT planning 74

Customs efforts to combat avoidance 75

Anti-avoidance legislation 75

Disclosure rules 78

10 CONVERSIONS TO DWELLINGS AND RRP BUILDINGS 79 Introduction 80

Examples of conversion from non-residential 80

Disapplication of the option to tax 81

Relevant residential purpose 82

11 OPTION TO TAX – PAST, PRESENT AND FUTURE 84 Introduction 85

The past 85

The present 87

The future 87

APPENDIX 90 Ten tips and ten traps 91

VAT and property – a marriage made in Europe

Most people can remember where they were when news broke of a shattering event, e.g the assassination of President Kennedy or the death ofPrincess Diana As testament to a ‘sad life’ as a VAT consultant, I can rememberprecisely where I was on 21 June 1988 (in my car and on my way to address ameeting of the West Wycombe Women’s Institute) when the European Court

world-of Justice (ECJ) released its judgement against the UK’s zero rated treatment

of commercial property transactions

The judgement of the ECJ heralded the most significant changes in the history

of VAT in the UK The necessary legislative amendments came into effect on 1April 1989 The main areas of change were as follows:

• Zero-rating for new construction was restricted to dwellings andbuildings for a relevant residential purpose (RRP) or a relevantcharitable purpose (RCP)

• Zero-rating for approved alterations to listed buildings was similarlyrestricted to dwellings, RRP and RCP buildings, and churches

• Zero-rating for the grant of a major interest, i.e freehold sale or grant

of a lease for a term of over 21 years was also confined to dwellings,RRP and RCP buildings

Freehold sales of new commercial buildings and of new civil engineering worksbecame standard rated

The option to tax was introduced; however, the option to tax rules did not comeinto effect until a few months later on 1 August 1989 Significantly there were

no anti-avoidance regulations introduced in connection with the option to taxfacility

This report is written at a time of uncertainty in the VAT and property world

At the time of writing important decisions of the ECJ are awaited, particularlythe Halifax case (see Chapter 9) This report deals with the complexities of UKand EU legislation, and provides an overview of the implications of commer-cial property transactions Residential property transactions are not within the

scope of the report with the exception of conversions to residential from residential property

non-The VAT rules, procedure and interpretation of the legislation are constantlychanging Every property transaction should be considered on its merits Thisreport is not a substitute for professional advice

Tim Buss

PKF

Chapter 1

VAT general principles

The VAT regime 4

VAT legislation 4

Registration 5

Rates of VAT 5

Scope of VAT 5

Output tax 7

Input tax 7

Time of supply 8

T H O R O G O O D

P R O F E S S I O N A L

I N S I G H T S

Chapter 1

VAT general principles

In order to appreciate the VAT implications of property transactions it is sary to be aware of certain basic principles of the tax

neces-The VAT regime

VAT was introduced into the UK on 1 April 1973 as a condition of the UK joiningthe European Single Market VAT is an indirect tax, under the care and manage-ment of H.M Customs & Excise (Customs) VAT is a multi-staged tax which isimposed at each stage of a chain of supplies of goods or services

VAT legislation

The UK law is contained in the VAT Act 1994 which is supported by numerousstatutory instruments Customs publish public notices and certain parts of thenotices (always highlighted) have the force of law Where a section does nothave the force of law, the notice represents Customs’ interpretation andopinion of particular VAT issues

Notwithstanding the terms of the UK legislation the UK Government is obliged

to implement the provisions contained in EU Directives The principal directive

is the Sixth Directive If the UK has not implemented EU provisions a UK taxpayer,but not Customs, can rely on the European directive where this would be to his

or her benefit

In effect EU law overrides domestic law An example is the proceedings takenagainst the UK in 1988 The ECJ ruled that the UK had not upheld the provi-sions of the Sixth Directive by allowing zero rating of commercial buildings (andwater, news services, fuel and power)

Where a question of European law is raised in the UK Courts or tribunals thematter can be referred to the ECJ for a preliminary ruling on the interpretation

of the European law involved

Judgements of the ECJ must be followed in the UK even where the casesconcerned are those of another member state

Registration

The UK has adopted a registration threshold which is currently £60,000 witheffect from 1 April 2005 The threshold is by far the highest in any of the memberstates of the European Union Businesses whose turnover does not reach theregistration threshold are not required to register for VAT, but can register volun-tarily Once registered, a business has to charge VAT (where applicable) on incomeand subject to certain rules can recover VAT on related costs and expenses

Group registration

Subject to certain conditions in respect of control, two or more companies lished in the UK can, if they wish, register for VAT as a single entity The principaladvantage of choosing to group register is that most supplies between VAT groupmembers are ‘disregarded’ for VAT purposes Group registration means thatonly one VAT return is submitted for the group

estab-Rates of VAT

The rate of VAT is currently 17.5% There is a reduced or lower rate of 5% and

a zero rate (nil %) which applies to certain goods and services The zero ratedgoods and services concerned are listed in the VAT Act 1994, Schedule 8, andthose at the lower rate are specified in VAT Act 1994, Sch 7A In addition, othersupplies are exempt from VAT (VAT Act 1994, Schedule 9) and others are outsidethe scope of UK VAT

Scope of VAT

In order to fall within the scope of UK VAT a supply has to meet the followingconditions:

• it is a supply of goods or services;

• it takes place in the UK;

1 VAT G E N E R A L P R I N C I P L E S

• it is made by a taxable person; and

• it is made in the course or furtherance of any business carried on by

A supply of services is anything which is not a supply of goods but is done for

a consideration The letting of property is a supply of services A free supply ofservices is outside the scope of VAT, generally referred to as non-business

Place of supply

There are complex rules for determining where a supply takes place As far asproperty is concerned the place of supply is the UK if the property is located inthe UK The UK includes England, Scotland, Northern Ireland, Wales and theterritorial waters of the UK The Isle of Man, whilst not strictly part of the UK,

is treated as though it is part of the UK for VAT purposes This treatment doesnot extend to the Channel Islands

Taxable person

A taxable person is defined in UK law as anyone who is or is required to be tered for VAT However, the definition in the Sixth Directive is far broader Article

regis-4 paragraph 1 states:

‘“Taxable person” shall mean any person who independently carries out

in any place any economic activity specified in paragraph 2, whatever thepurpose or results of that activity.’

The economic activities specified in paragraph 2 of Article 4 crucially for thepurposes of this report include:

‘The exploitation of tangible or intangible property for the purpose ofobtaining income there from on a continuing basis shall also be consid-ered an economic activity.’

1 VAT G E N E R A L P R I N C I P L E S

The definition of business in UK law is in the VAT Act 1994, Section 94 Thisstates that business includes ‘any trade, profession or vocation’ However, theterm ‘business’ is far wider and covers activities not normally treated as a businessunder direct tax law, e.g the letting of property

Output tax

The tax charged on supplies is known as output tax Output tax is calculated ateither 17.5% or 5% (as appropriate) of the value of the supply The value on whichVAT is chargeable on a supply is determined in accordance with rules in theVAT Act 1994, Section 19:

‘If the supply is for a consideration in money its value shall be taken to be suchamount as, with the VAT chargeable, is equal to the consideration.’

The effect of this is where the consideration does not specify VAT; the eration shall be taken to be VAT inclusive

consid-Input tax

Input tax is defined in the VAT Act 1994, S24 (1), as the tax on goods or servicessupplied to a person, tax on the acquisition of goods from a member state (andthe tax payable on importation) being, in each case, goods or services used, or

to be used, by a person for the purpose of any business carried on, or to be carried

on, by the person concerned

A business can recover VAT on costs relating to taxable transactions (at thestandard rate, lower rate and zero rates) A claim for input tax must be supported

by a tax invoice unless Customs agree or direct otherwise

It is critical to land and property transactions to remember that VAT cannot berecovered on costs relating directly or indirectly to exempt supplies Where abusiness makes both taxable and exempt supplies, there are particular rules known

as partial exemption rules (see Chapter 7) which may restrict the amount of VATthat a business can reclaim

1 VAT G E N E R A L P R I N C I P L E S

Time of supply

VAT becomes chargeable at a specific time (known as the tax point) VAT must

be accounted for by reference to the VAT return period in which the tax pointoccurs (unless the business is operating a special cash accounting scheme) Therules for determining the tax point differ depending on whether the supply is

a supply of goods or a supply of services The tax point rules with an emphasis

to property transactions are described below

Goods

Where the supply is of goods the tax point is the date the goods are removed.For property transactions the tax point is the date the property is made avail-able to the purchaser, normally the completion date However, this tax pointknown as the basic tax point is overridden by what are termed actual tax points.Actual tax points are payments received (i.e deposits) or invoices issued inadvance of the basic tax point, or the date of invoice provided the invoice is issuedwithin fourteen days of the basic tax point The facility exists to agree with Customs

an extension of the fourteen day period, e.g if the business concerned normallyissues invoices monthly

Services

The basic tax point for a supply of services is when the services are performed.Customs generally interpret this as meaning the date on which all the work,except invoicing, is completed The basic tax point is overridden by actual taxpoints as described in the previous paragraph

Continuous supplies of services

There are special tax point rules for what are termed continuous supplies ofservices The rules are necessary because for continuous supplies there is noperformance tax point as the services are never completed The leasing and letting

of property falls within the continuous supply rules For leasing and letting thetax point is the earlier of date of issue of tax invoice or receipt of payment

1 VAT G E N E R A L P R I N C I P L E S

Chapter 2

VAT Liability of commercial

property transactions

UK legislation 10

European legislation 10

Exceptions from exemption in the UK 12

Freehold sales of commercial buildings or civil engineering works 13

Definition of an RCP building 13

Gaming and fishing rights 14

Hotel accommodation 14

Holiday accommodation 15

Caravan and tent pitches or camping facilities 16

Parking facilities 16

Sports facilities 18

T H O R O G O O D

P R O F E S S I O N A L

I N S I G H T S

Chapter 2

VAT Liability of commercial

property transactions

UK legislation

The VAT legislation (VAT Act 1994, Sch 9, Group 1) exempts:

‘The grant of any interest in or right over land or of any licence to occupythe land, or, in relation to land in Scotland, any personal right to call for

or be granted any such interest or right.’

Note (1) to Group 9 states that ‘Grant includes an assignment or surrender andthe supply made by the person to whom an interest is surrendered when there

is a reverse surrender’

Note (1A) defines a reverse surrender as ‘one in which the person to whom theinterest is surrendered is paid by the person by whom the interest is being surren-dered to accept the surrender’

The inclusion of reverse surrenders (a term which appears to have been invented

by Customs) within the exemption may be incorrect under European law (seechapter 5)

European legislation

The UK legislation expresses the exemption by employing English land law nology It is interesting that the over-riding law on VAT, the EC Council SixthDirective, expresses the exemption rather differently Grant of an interest andlicence to occupy is not mentioned Instead there are three distinct categories

termi-of exemption:

• the leasing or letting of immovable property;

• the supply of buildings; and

• the supply of land

Leasing and letting

Article 13B(b) of the Sixth Directive exempts the ‘leasing or letting of able property’ There are specific exclusions which broadly the UK has followed(see below)

immov-Article 13B (b) excludes the following from the exemption:

• The provisions of accommodation, as defined in laws of the memberstates, in the hotel sector or in sectors with a similar function, includingthe provision of accommodation in holiday camps or on sitesdeveloped for use as camping sites;

• The letting of premises and sites for parking vehicles;

• Lettings of permanently installed equipment and machinery;

• Hire of safes

The Article allows member states to apply further exclusions from the scope ofthe exemption

The UK has followed the exclusions referred to above with the exception of hire

of safes There is no specific exclusion in UK legislation for the hire of safes.The UK’s position is that specific exclusion is unnecessary as exemption doesnot apply to articles not fixed to the land

Supply of buildings

Article 13B (g) exempts ‘the supply of buildings and parts thereof and land onwhich they stand’ The supply before occupation of buildings or parts of build-ings and the land on which they stand is specifically excluded from theexemption This exclusion therefore provides that the supply of new commer-cial buildings is liable to VAT

Land

Land is subject to a separate exemption under Article 13B (h) which exemptsthe supply of land which has not been built on other than ‘building land’ However,Article 28 of the Sixth Directive allows member states to retain exemption forbuilding land, and most member states including the UK have done so

2 VAT L I A B I L I T Y O F C O M M E R C I A L P R O P E R T Y T R A N S A C T I O N S

Building land

The UK rule on the VAT liability of building land was challenged in the case ofNorbury Developments Limited v C & E Commissioners, CJEC (1999) STC511(TBC21.307) The VAT tribunal held that the sale of building land is taxable ratherthan exempt, unless the exemption was authorised by Article 28(3) (b) of theSixth Directive The VAT tribunal referred the case to the ECJ which held thatthe UK was entitled to exempt the supply under Article 28(3) (b) The exemp-tion for building land is however transitional and at some stage the UK will have

to tax sales of building land The obvious question will then be how to definebuilding land

Exceptions from exemption in the UK

The specific exceptions to the exemption in the UK are contained in the VATAct 1994, Sch 9, Group 1, Item 1 In broad terms the exceptions, which are liable

to VAT, are as follows:

• Freehold sales of new or uncompleted commercial buildings or civilengineering works New is defined as completed within the three yearsbefore the grant concerned

• Rights to take game or fish

• The provision in a hotel, inn, boarding house or similar establishment

• The provision of pitches for tents or of camping facilities

• The grant of facilities for parking a vehicle

• The grant of any right to fell and remove standing timber

• The grant of facilities for housing or storage of an aircraft or formooring, or for storage of any ship, boat or vessel

• Sports facilities

• Viewing accommodation at sports grounds, theatres etc

2 VAT L I A B I L I T Y O F C O M M E R C I A L P R O P E R T Y T R A N S A C T I O N S

• The grant of any right including an equitable right, a right under anoption or right of pre-emption or in relation to Scotland, a personalright, to acquire an interest in land which would be taxable under one

of the exceptions described above

The more common exceptions are considered in detail

Freehold sales of commercial buildings

or civil engineering works

The freehold sale of new or uncompleted buildings or civil engineering works

is subject to VAT at the standard rate, currently 17.5% The standard rate is applied

to every, ie not just the first, sale of the freehold of a new or uncompleted buildinguntil three years after the earlier of the certificate of practical completion or firstfull occupation

In the case of a civil engineering work the standard rate applies to all sales withinthree years after the earlier of the certificate of completion or the first full use

of the work

Standard rating does not apply to a building designed as a dwelling or a number

of dwellings, or to an RRP or RCP building The grant of a major interest (freehold

or lease of over 21 years) in a dwelling, RRP or RCP building is zero-rated rating is subject to a number of conditions in the case of RRP and RCP buildings.(There is a definition of RRP buildings in Chapter 10.) Where a new building ismixed, eg a shop with a flat above, standard rating only applies to the shop It

Zero-is therefore necessary to apportion the sale price

Gaming and fishing rights

The grant of any interest, right or licence to take game or fish is standard rated.However, standard rating does not automatically apply to the sale of freeholdland containing gaming or fishing rights Where a landowner grants or trans-fers the freehold of land over which the right to take game or fish is excisable,the supply of the land is exempt (subject to the option to tax) An apportion-ment to the sale price has to be made when land is transferred and the right totake game and fish is valuable

Hotel accommodation

The provision in a hotel, inn, boarding house or similar establishment of sleepingaccommodation, or accommodation in rooms which are provided in conjunc-tion with sleeping accommodation or for the purposes of supply of catering isstandard rated

Reduced rate

Where guests stay for a continuous period of four weeks or more, VAT is able on a reduced value from the 29th day The effect is that from the 28th day,VAT has to be accounted for on a minimum of 20% of the total charge for theroom and facilities VAT remains due on meals, drinks and service charges Thecharge for the room and related facilities can be reduced by excluding the value

charge-of the right to occupy the accommodation However, the value ascribed to thefacilities must not be less than 20% of the total amount due for facilities andaccommodation Hotel providers frequently make the mistake of including thereduction in value in the total of exempt income The difference in value is notexempt so by itself does not give hoteliers any partial exemption problems

Similar establishment

Similar establishment includes premises held out as being suitable for use byvisitors or travellers, which contain sleeping accommodation, whether or notthere is provision of board or facilities for the preparation of food The vagueterm ‘similar establishment’ has lead to a number of disputes between taxpayersand Customs, particularly in establishments providing shelter for the homeless,hostels and student accommodation The question a tribunal frequently has toanswer is whether the establishment concerned is in competition with hotels,inns etc

2 VAT L I A B I L I T Y O F C O M M E R C I A L P R O P E R T Y T R A N S A C T I O N S

Leasing/licensing hotel buildings

The exception from exemption does not apply to leases or licences of hotel ings If H plc lets a hotel to O plc and O plc operates the hotel, the supply by Hplc is exempt (subject to the option to tax) O plc will make taxable supplies ofhotel accommodation to users

or premium for a lease in ‘old’ holiday accommodation is exempt

Dwelling or holiday accommodation

Difficulties can arise in deciding whether or not a new building is a dwelling orholiday accommodation In this context it is necessary to consider the VAT Act

1994 Group 5 Item 1 (a) (i) of Group 5 zero rates the first grant of a major interest

in a dwelling However, Note (13) to Group 5 reads as follows:

‘The grant of an interest in, or in any part of:

1 A building designed as a dwelling or a number of dwellings; or

2 The site of such a building

It is not within item 1 (ie it is not zero-rated) if:

i) The interest granted is such that the grantee is not entitled to reside

in the building, or part, throughout the year; or

ii) Residence there throughout the year, or use of the building or part asthe grantee’s principal private residence is prevented by the terms of

a covenant, statutory planning consent or similar permission.’

The consequence of the note is that the grant of a freehold or a lease over 21years by a person constructing a new dwelling is subject to VAT at the standardrate if the grantee is not entitled to reside in the building or part of the buildingthroughout the year

2 VAT L I A B I L I T Y O F C O M M E R C I A L P R O P E R T Y T R A N S A C T I O N S

The case of Barbara Ashworth

Whether or not ‘restricted occupancy’ means that the grant of a major interest

in a new building is standard, rather than zero rated, has been the subject of anumber of disputes between taxpayers and Customs There was an importantvictory for the taxpayer in the case of Barbara A Ashworth (LON/94/221) Theappellant owned a long lease in a waterside lodge at a Marina The lease prohib-ited occupancy of the lodge during the month of February The appellant occupiedthe lodge as her home for the rest of the year The VAT tribunal decided thatthe discontinuing nature of the appellant’s leasehold interest did not place theproperty in the same category as a hotel or similar accommodation The supplywas exempt rather than standard rated

Customs’ change of view

Following the tribunal’s decision, Customs changed their view of the liabilityand their current opinion is set out in leaflet 709/3/93 The relevant extract is asfollows:

‘However, the sale or lease of a flat or house which can be used as a person’sprincipal private residence but which cannot be occupied throughout theyear due to a time break or restriction on occupancy is exempt, if the devel-opment on which it is situated is not a holiday development and it is notadvertised or held out as such This also applies to any periodic chargessuch as rent and service charges.’

Caravan and tent pitches or camping facilities

The provision of seasonal pitches for caravans and the grant of facilities forcaravan parks are standard rated A seasonal pitch is a pitch which is providedfor less than a year, or is provided for more than a year but where there is arestriction on occupation The provision of pitches for tents or camping facili-ties is also standard rated

Parking facilities

The grant of facilities for parking vehicles is standard rated There is normally

a standard rated supply of parking facilities if a specific grant is made and ities are designed for, or provided specifically for, the purpose of parking vehicles

facil-2 VAT L I A B I L I T Y O F C O M M E R C I A L P R O P E R T Y T R A N S A C T I O N S

The case of Trinity Factoring Services Limited

In the case of Trinity Factoring Services Limited (CS 1994) (SDC504) the Courtdecided that rent for garages which are let and used to store goods was stillliable to VAT at the standard rate The Court of Session held there was a plainimplication the garages were for parking, and if the terms of the letting did notactually preclude parking the supply was standard rated

Customs’ views

Customs’ views on the VAT liability of car parking are contained in leaflet number701/24/92 In particular it should be noted that the sale of a new dwelling togetherwith garage or parking space by the person constructing that dwelling is normallyzero-rated, unless it is standard-rated holiday accommodation

Letting in conjunction with dwellings

The letting of garages or parking spaces in conjunction with the letting ofdwellings for residential use is exempt provided:

• the garage or parking space is reasonably near to the dwelling; and

• the letting is by the same landlord to the same tenant, whether under

a single agreement or separate agreements

Sales of garages etc

Freehold sales of new or partly completed garages, car parks or car parkingfacilities other than in conjunction with the sale of new dwellings is standard-rated The freehold sales of garages, car parks or parking facilities which arenot new are exempt (with the option to tax)

Provision in conjunction with commercial premises

Where garages or other parking facilities are provided in conjunction with theletting of commercial premises the supply is treated as a single supply of thecommercial premises, provided:

• the facilities are within or on the property or reasonably near to it; or

• the facilities are within a complex; and

• both lettings are to the same tenant by the same landlord

The consequence therefore, is if the rents from commercial premises are exempt,the parking facilities will also be exempt

2 VAT L I A B I L I T Y O F C O M M E R C I A L P R O P E R T Y T R A N S A C T I O N S

Sports facilities

The grant of facilities for playing any sport or participating in any physical ation is standard rated This will not apply where the grant of the facilities isfor:

recre-• a continuous period of use exceeding 24 hours; or

• a series of ten or more periods, whether or not exceeding 24 hours

in total, where certain conditions are satisfied

Conditions for exemption

The conditions under which lettings for more than ten periods qualify for tion are:

exemp-• that each period must be in respect of the same activity carried on inthe same place;

• the interval between each period is not less than one day and not morethan fourteen days;

• the consideration is paid by reference to the whole series and isevidenced by written agreement;

• the grantee has exclusive use of the facilities; and

• the grantee is a school, club, an association or an organizationrepresenting affiliated clubs or constituent associations

2 VAT L I A B I L I T Y O F C O M M E R C I A L P R O P E R T Y T R A N S A C T I O N S

Chapter 3

Land and licence to occupy land

Definition of land 20Buildings 20Scope of the exemption for land and buildings 21Immovable property 21Licences to occupy 22Licence to use facilities 23Customs’ examples 24

T H O R O G O O D

P R O F E S S I O N A L

I N S I G H T S

It should be noted that the VAT Act 1994 does not refer to ‘commercial ings’ This term is used to cover anything that does not fall into any of thecategories that attract special treatment, ie standard or zero rating Standardrating applies to the exceptions to the exemption mentioned in Chapter 2 Zero-rating applies to new dwellings which are defined as any self-contained livingaccommodation, without internal access to or from another dwelling, and includeshouses and flats Zero-rating also applies to RRP and RCP buildings

build-The grant of a lease in a commercial building or civil engineering work is anexempt supply, subject to the election to waive exemption, commonly known

as the option to tax The option to tax is explored in Chapter 4 The freeholdsale of an ‘old’ commercial building or civil engineering work, ie more than threeyears after the date of completion, occupation (building) or use (civil engineeringwork) is exempt, subject to the option to tax

Scope of the exemption for land and buildings

The exemption covers land and anything fixed to the land However, tion does not necessarily apply to the sale or letting of loose items In exemptingthe supply of land, Article 13B (h) of the 6th Directive uses the word ‘land’ butdoes not elaborate on this or give any definition other than referring to ‘landwhich has not been built on’

exemp-The exemption in Article 13B (g) for the supply of buildings covers ‘or partsthereof’ and ‘the land on which they stand’ Article 4.3 of the 6th Directive statesthat a building shall be taken to mean any structure fixed to or in the ground.The approach under English land law and the European Directive are different

In English land law, a building or fixed structure would normally count as part

of the land and be owned with it In some European countries, it is possible toown a building without having interest in the land on which it stands

English land law differentiates between fixtures and fittings A fixture isregarded as part of the land whilst a fitting is not For practical purposes Customshas accepted that fixtures fall within the land exemption Fittings, if they aresubject to a separate supply do not, but the borderline is not always entirelyclear

Immovable property

The leasing and letting exemption is contained in Article 13B (b) of the 6th tive This Article does not use the word ‘land’ at all but refers to immovableproperty There is no definition of immovable property in the Directive, but theDirective does give specific exclusions for ‘permanently installed equipment andmachinery’

Direc-There is therefore a difficulty in establishing whether something is ‘immovable’and exempt under the European 6th Directive Two cases of note are Commis-sion v France (CJEC Case C-60/96) and Rudolph Maierhofer (CJEC CaseC-315/00)

The case of Commission v France

The ECJ held that immovable property did not cover touring caravans, tents,mobile homes and light-framed leisure dwellings that were fixed to the ground

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The Court decided that these were movable since they were capable of beingeasily moved.

Despite the Commission v France case, the UK continues to treat the letting site of residential caravans and houseboats as exempt

on-The case of Rudolph Maierhofer

In the Rudolph Maierhofer case, and apparently in contrast to the France decision,the ECJ held that temporary buildings were immovable property Although thebuildings could be dismantled and moved, the process was very labour inten-sive and time consuming

The Rudolph Maierhofer case is also interesting for the fact that Herr hofer had no interest in the land on which the buildings stood The ECJ, whengiving its judgement, said that it was irrelevant whether the letting was of boththe land and the building, or of just the building built on the lessee’s land; it wasenough for the property to be immovable

Maier-The UK’s view remains that the lessor does need an interest in the land to comewithin the exemption The ECJ decided that immovable property did not have

to be fixed to or in the ground, and it was irrelevant that buildings would beremoved at the end of the lease and re-used elsewhere The ECJ clearly statedthat the meaning of ‘immovable property’ could not be determined in terms ofthe civil law of a particular member state

Licences to occupy

Defining a ‘licence to occupy’, as opposed to a licence to use land, is important

as transactions which fall short of licences to occupy are standard rated Customshave made many attempts to review the meaning of ‘licence to occupy’ withinthe scope of the UK and EU exemption There has been a raft of case law inrecent years

The case of Sinclair Collis

One significant case which seemed to go on forever is Customs & Excise v SinclairCollis Ltd (C-275/01) This case progressed from the VAT tribunal to the Court

of Appeal and on every occasion the decision was reversed The case was appealed

to the House of Lords who decided to refer the question of the VAT liability tothe European Court

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Sinclair Collis owned cigarette machines and installed machines in public houses.The question was whether or not the supply by the site owner in agreeing tothe installation of a cigarette machine in a pub was a supply by the site owner

of the letting of immovable property The ECJ decided that the agreement betweenthe site owner and Sinclair Collis did not constitute a ‘letting of immovableproperty’ within Article 13B (b) of the Sixth Directive The ECJ stated that thefundamental characteristics of a leasing or letting of immovable property withinArticle 13B (b) are that the leasing or letting:

• related to immovable property (firmly fixed to or in the ground);

• was a right to occupy a particular property;

• confered a right to control access or exclude any other person;

• as if the person were the owner, for an agreed period and for payment

In the case of Sinclair Collis, the ECJ saw the occupation of space as merely away of affecting the real supply which was the grant of the exclusive right tosell cigarettes on the premises

The case of Abbotsley Golf & Squash Club

In an earlier case, Abbotsley Golf & Squash Club (VTD 15042), Customs attempted

to sustain an argument that the supply of a licence granted to the golf and squashclub operator to use the land and clubhouse was non-exclusive (as members ofthe public have access) and was therefore not exempt The tribunal held thatthe licence was a lease in all but name and was within the meaning of ‘leasingand letting’ of land

Licence to use facilities

A licence to use facilities is a taxable supply as it falls short of the exemptionfor a ‘licence to occupy’ This can afford some flexibility and a means of obtainingrecovery of VAT on related costs where the option to tax is not available Care

is required however, and businesses have to be wary of Customs drive on ance (Chapter 9)

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Customs’ examples

Customs gives examples of licences to occupy land in its Notice 742 The following

is an extract from Notice 742 which was last amended in December 2003, followingthe decision in Sinclair Collis:

Licences to occupy

• The provision of office accommodation, such as a specified bay, room

or floor together with a right to use shared areas such as receptions,lifts, restaurants, rest rooms, leisure facilities and so on

• The provision of a serviced office that includes use of telephones,computer system, fax machine, photocopiers and so on

• Granting a concession to operate a shop within a shop, where theconcessionaire is granted an area from which to sell their goods orservices

• Granting space to erect advertising hoardings

• Granting space to place a fixed kiosk on a specified site, such as anewspaper kiosk or flower stand at a railway station

• Hiring out a hall or other accommodation for meetings or parties and

so on Use of a kitchen area, lighting and furniture can be included

• Granting a catering concession where the caterer is granted a licence

to occupy a specific kitchen and restaurant area, even if the grantincludes use of kitchen or catering equipment

• Granting traders a pitch in a market or at a car boot sale

• Providing another person with access to office premises to make use

of facilities, such as remote sales staff away from home having access

to photocopiers and the like at another office

• Allowing the public to tip rubbish on your land

• Storing someone’s goods in a warehouse without allocating any specificarea for them

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• Granting of an ambulatory concession, such as an ice-cream van onthe seafront or hamburger van at a football match.

• Allowing the public admission to premises or events such as theatres,historic houses, swimming pools and spectator sports events Thisincluded admission to a series of events such as a season ticket

• Any grant of land clearly incidental to the use of the facilities on it,such as hiring out safes to store valuables, the right to use facilities in

a hairdressing salon or granting someone the right to place a standing or wall mounted vending or gaming machine on yourpremises

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Chapter 4

Option to VAT

Introduction 27Why opt? 27Commercial considerations 27Interaction with stamp duty land tax 28Option ineffective 28Scope of an option to tax 29Who can opt? 30How is the option exercised? 32Option to tax – national unit 33Problems with notifications/acknowledgements 34Adding VAT to rents 34Informing tenants 35Subsequent works 35

T H O R O G O O D

P R O F E S S I O N A L

I N S I G H T S

Chapter 4

Option to VAT

Introduction

Making an election to waive exemption, commonly known as exercising an option

to tax allows vendors or landlords to charge VAT at the standard rate on whatwould otherwise be exempt transactions Subject to a number of conditions andexceptions any person can opt to tax land or commercial buildings Followingthe exercise of an option VAT becomes chargeable on all future income fromexploitation of the property, including final disposal

Why opt?

Taxpayers are normally reluctant to charge VAT, so why would anyone tarily exercise an option to tax The three most common reasons for opting totax are:

volun-• to recover VAT on costs that would otherwise be irrecoverablebecause the costs would relate to exempt supplies (see Chapter 6);

• to ensure that the purchase of an opted property and the acquisition

of the freehold in a ‘new’ commercial building can be treated as thetransfer of a going concern (Chapter 8);

• to avoid a clawback of VAT under the Capital Goods Scheme rules(Chapter 7)

Commercial considerations

Consideration should always be given to the commercial consequences of opting.For example, the state of the property market in the area concerned, or whetherthe tenant or purchaser will be able to recover the resulting VAT charges

The VAT considerations include:

• How much VAT is at stake?

• Is recovery of VAT possible anyway by virtue of the partial exemption

de minimis rules (chapter 6 refers)?

• If you are not already VAT registered can your system cope with therequirements of VAT registration?

• Would the VAT saved by opting be outweighed by additional stampduty land tax?

Interaction with stamp duty land tax

Stamp duty land tax (SDLT) is payable by the purchaser on the VAT inclusiveconsideration for any land or property transaction Charging VAT thereforeincreases the amount of SDLT payable It may be considerably cheaper for apurchaser to pay the vendor’s irrecoverable VAT rather than pay say an additional4% on 17.5% The SDLT position could be even worse if the inclusion of VAT

in the consideration means the band of SDLT increases (SDLT ranges from 1%

to 4% depending on the value of the property)

Option ineffective

The option to tax is not effective i.e it is disapplied, in the following circumstances:

• A building intended to be a dwelling or a number of dwellings However,the VAT legislation allows the option to remain effective if it relates

to a commercial building that is intended to be converted to adwelling or dwellings, provided the purchaser will ultimately use theproperty to make zero-rated supplies Both parties must agree to theretention of the option in writing

• A building (or part of a building) intended for use solely for a relevantresidential purpose

• A building (or part of a building) intended for use solely for a relevantcharitable purpose otherwise than as an office

• Where a grant is to be made by a developer and it is the intention orexpectation of the developer that the land will become exempt land(this is an anti-avoidance provision, see Chapter 9)

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• Where land is supplied to a registered Housing Association for housebuilding or when a plot is supplied to an individual who intends tobuild a dwelling for himself on the site.

• The supply of a pitch for a residential caravan or facilities for mooring

a houseboat

The definitions of relevant residential and relevant charitable purpose aredescribed in Chapter 10 and Chapter 2 respectively

Scope of an option to tax

The option to tax can be exercised in respect of any land, non-residential building

or civil engineering work As far as buildings are concerned, the option can beexercised on a building by building basis It is not possible to opt on only part

of a building Buildings/units linked either by a common roof or by a coveredwalkway are regarded as single buildings A complex is treated as a single building

if it consists of a number of units grouped around a fully enclosed concourse,such as an enclosed shopping precinct Options could be made on parts of build-ings or buildings which are part of a complex by transferring the buildings toseparate ownership This decision is of course subject to other tax and commer-cial considerations

Discrete areas of land

The option extends to all the land, and any buildings or civil engineering workswhich are part of the land It is possible to opt on discrete areas of land providedthe area is specified to Customs The option on a discrete area will not affectany adjoining land An option extends to land immediately around the optedbuilding such as forecourts, yards etc

Customs’ guidance

Defining and agreeing with Customs exactly what the option covers can be adifficult issue and where there is doubt as to the geographical extent of an optionthe vendor or landlord is advised to discuss the matter and agree the extent ofthe land being opted with Customs In their public notice 742A Customs givethe following guidance on the extent of an option:

‘If the building stands in a large area of land, how far the option extendsover the land depends on how far the services of the building can be utilised

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For example, a racecourse grandstand may provide electricity and shelterfor stalls, or other facilities, within its peripheral area An option to tax onthe grandstand would extend over the whole area of land that uses thebenefits.’

Who can opt?

The option to tax is personal to the person making the option The option doesnot bind any other person, including successors in title Any successor can makehis or her choice as to whether to exercise the option to tax In practice a successorwill normally be conditioned by the nature of the supply to him or her If VAThas been charged on the acquisition of the interest it will generally be worth-while opting to avoid otherwise irrecoverable VAT

VAT groups

There are special rules for VAT groups Where an option is exercised by anindividual member of a VAT group, the option to tax binds the member notifyingthe option and all other members of the VAT group, both at the time of notifi-cation and in the future The effect of this rule is that an option applies and extends

to the VAT group as a whole This can be illustrated by an example:

A and B are members of a VAT group A opts to tax a property which itowns and the option also binds B Subsequently, C joins the VAT groupand the option made by A also binds C

Partnerships

Where land is held by a partnership or in trust there can be difficulties in decidingwho should exercise the option and register for VAT The option should beexercised by the beneficial owner, not the legal owner If there is more than onebeneficial owner, the owners will be expected to opt as one person and to registerfor VAT as a partnership For UK limited partnerships, it is the general partnerwho should opt Where there is more than one general partner the generalpartners should opt together as a partnership For any other type of partner-ship, including a limited liability partnership (which is a corporate body ratherthan a partnership), the body should opt as one entity

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Joint ventures

Particular care is needed with joint ventures There are various ways ofhandling joint venture situations when it comes to registering and opting

The permutations can be explained by an example:

Paul and Simon enter into a joint venture with Simon retaining

ownership of the land.

1 The agreement of Customs could be obtained to:

• Simon issuing the VAT invoice to the purchaser in his

(Simon’s) name;

• Simon and Paul making options on the property;

• Paul accounting for VAT on half the sale proceeds and

recovering VAT on half the costs paid to third partycontractors

2 Simon invests half the beneficial interest in the property to Paul

Under this route:

• Simon will issue the invoice in his name but half the invoice

figure was issued as nominee for Paul;

• Paul will account for half the output tax and claim half the

VAT on costs;

It would be prudent to obtain Customs permission and both

would have to opt

3 If the land is owned jointly beneficially then both could opt with

Simon holding the legal interest In strict law two invoices would

have to be issued to the purchaser to reflect VAT on the

wholesale proceeds

As far as VAT recovery is concerned, Simon will have employed

the contractors and is the only one who can recover VAT

However, Simon will have made a supply to Paul when

recharging half the costs Simon accounts for output tax with

Paul recovering the VAT charged as input tax

Alternatively, Simon issues the sale invoice but Paul charges

VAT to Simon on his share of the proceeds Again, it is

impor-tant to agree the procedure with Customs

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