HMRC have released a new version of Notice 742 which sets out their policy in respect of land and property issues.
A full version of the updated notice can be found here. The main principles set out within the notice have not changed. However, we have summarised the key changes/clarifications below:
Definition of “licence to occupy land” – paragraph 2.5
HMRC have made minor changes to their guidance regarding the definition of a “licence to occupy land”. This is to bring UK guidance in line with EU principles.
Civil engineering works – paragraph 3.3
HMRC now consider that the sale of land containing new civil engineering works where those works are a minor part of the supply is a supply of exempt land (subject to the option to tax). Previously they had required an apportionment to be made between the land (if exempt) and the civil engineering element (standard rated).
Guidance on parking for dwellings – paragraph 4.4
HMRC now accept that the first sale or long lease of a garage or car parking space can be zero rated even if sold after the sale of the residential unit. This change of policy should mean that housebuilders have an opportunity to seek repayment of VAT incorrectly accounted for (subject to the four year ‘capping’ provisions). The letting of garages or parking spaces in conjunction with the letting of dwellings for permanent residential use (under shorthold tenancy agreements or similar) is exempt providing that:
- the garage or parking space is reasonably near to the dwelling, and
- the tenant takes up both the lease of the dwelling and the lease of the garage or parking space from the same landlord.
Guidance on the treatment of land and buildings on hand at deregistration - paragraph 7.8
If you cancel your VAT registration because you are closing down your business or trading below the registration limits, some or all of the assets on hand (including land and buildings) may be treated as supplied by you when you deregister. HMRC provide further guidance on this matter at paragraph 7.8 to Notice 742.
Inducement payments – paragraph 10.1
The guidance on ‘inducement’ payments has been updated following the 2001 ECJ decision in ‘Trinity Mirror’. Where the tenant acts as an anchor tenant (in order to attract other tenants) their supply will always be a standard rated supply. In such cases, the input tax you incur on the payment to the tenant is attributable to your lettings of the building and will generally be recoverable where you have opted to tax.
If you wish to discuss any of the above further or any other VAT and property matter, please contact Sarah Franklin on 01962 735350.
In the recent VAT case stated above, Mr Fox owned land in Cornwall, consisting of an old barn and a separate garage. These buildings were derelict and were converted such that the new dwelling would consist of two buildings, the old barn becoming the main living area and the garage solely having a bedroom and bathroom. The two buildings were within one curtilage and intended to be used together. Most of the building work was done by Mr Fox himself.
The Tribunal concluded that it is possible that a single dwelling can consist of two or more buildings. The Tribunal added that this is supported by the fact that the tests for the definition of a dwelling relate to the dwelling and not each building. On this basis the appeal was allowed. The Tribunal went on to consider Mr Fox’s second argument in case either the Fox or the Catchpole decision was overturned. The Tribunal concluded that looking at the barn in isolation it was converted into self-contained accommodation and all the tests for recovery of VAT on the barn conversion had been met.
It is not uncommon that more than one building remains in such situations where a number of outbuildings are converted. HMRC can challenge VAT recovery under the DIY housebuilders’ scheme on the basis that one of the buildings is not capable of separate use or disposal and is also not intended to be used together with the other building(s). It is therefore worth considering whether there are one or multiple dwellings under the tests described within Mr T Fox. Depending on the stage of the development, it may also be beneficial to consider if slight changes to the make-up and use of the various buildings can result in a more favourable VAT position. We would be happy to advise in relation to such matters.
The case was almost identical to an earlier case which the Judge had heard – Mark Catchpole v HMRC. According to the decision, this had been released but because of the timing had not been considered by either party. Whilst this led the Judge to the conclusion that this simplified the case, the Mark Catchpole decision does not appear to have been released yet (even though it was heard in February, one month before Fox).
The two buildings described above were within one curtilage and intended to be used together.
The decision focused on the definition of a dwelling under Note 2 to Group 5 of Schedule 8 to the VATA 1994. This states that:
“A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied:
(a) the dwelling consists of self-contained living accommodation;
(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and
(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent”.
HMRC applied the tests above to each building. The converted garage failed the above condition because the bedroom and bathroom were not self-contained living accommodation. Mr Fox argued that as the buildings constituted one dwelling and that the tests in Note 2 should be applied to the buildings together as a whole. Mr Fox’s secondary argument was that even if considered separately the VAT costs in relation to the barn conversion should be allowed.
It is common ground that a new self-contained residential dwelling is not treated as such for VAT purposes if it is incapable of being either used or disposed of independently. This generally prevents ‘granny annexes’ from benefitting from either the zero-rate on construction or claims under the DIY housebuilders scheme.
Restrictions on separate disposal which are included within planning consent granted have often prevented the application of the zero-rate for construction costs and / or claims under the DIY scheme. Therefore, it is important to know whether such restrictions maybe applicable to prevent unexpected VAT costs. However, some restrictions do not necessarily prevent zero-rating e.g. a restriction on the sale of a dwelling without adjoining farm land does not necessarily prevent either the zero-rate from applying on construction costs, or a DIY housebuilders claim.
This was the issue in a recent Tribunal decision. A restriction on disposal was contained within the planning permission issued by a local authority; however, whilst the property sat within the geographical perimeter of the local authority, it also sat on land owned by a national park. As such it came within the authority of the national park and not the local authority for planning purposes. Whilst planning permission may have been required for other purposes, the local authority was not the relevant planning authority and therefore the permission granted had no effect. This meant that the restriction was not effective, and the property was eligible for a claim under the DIY housebuilders scheme.
This reflects the complexity of VAT, and the importance of understanding the core rules and applicable definitions. There are several reliefs available from VAT at both the zero and reduced rate, but only where the relevant circumstances and / or facts exist. In the same way, an Option to Tax on an otherwise exempt property transaction can produce significant cash-flow savings, but should not be entered into lightly, unless the full facts are considered. Businesses can soon find themselves out-of-pocket and/or falling foul of anti-avoidance provisions.
The VAT law concerning land and property transactions and developments continues to create issues, which tend to be costly and are often avoidable. Anyone considering a transaction or development relating to property should seek advice on the VAT position and / or consequences as small oversights or misunderstandings can be costly.
We’ve been working with quite a few property letting businesses and we thought it would be worth highlighting some of the significant delays we have encountered with HMRC Registration and Option to Tax (OTT) units.
We worked with one particular client who was refurbishing a commercial property prior to it being let. The Option To Tax Notification was sent to the relevant HMRC unit in Glasgow for processing at the same time as the registration forms were sent to Wolverhampton. Some weeks passed with no response from the OTT unit and telephone calls to them were met with an answer phone saying the Unit was too busy to take calls! The delay in getting the OTT in place resulted in a delay in getting the business registered for VAT and and thus impacted on the cashflow of the refurbishment project. We have had some situations where VAT registrations cases have been put in abeyance at the Registration Unit due to a delay with the OTT Unit. This could be symptomatic of a lack of communication within HMRC.
All of this is not good news for businesses. As yet we don’t know the reason for such delays from HMRC, whether it is down to a lack of resource or simply too much work for them to manage, it’s a situation that is difficult to control. Either way we would urge anyone planning such a project or entering into these kind of transactions to plan ahead as much as possible – make sure that submitting the appropriate VAT registration forms is one of the first items on your to do list!
We would be interested in hearing from you if you have had any similar experiences or if you’ve received your VAT registration with no such problems!
It has always been the case that HMRC accepted that a design and build contract was a route to avoiding standard rate VAT on professional architect fees. Essentially the fees became part of an overall contract of new build services and were thus also zero rated when supplied on with such services. Obviously this route needs to be carefully planned and contracts worded appropriately, but the potential savings to developers or more importantly charities were huge.
Although the recent draft confirmed that professional fees would become standard rated under these contracts and should be apportioned appropriately, it has now been confirmed, by members of the Charity Tax Group who pressurised HMRC to withdraw the changes, that the proposal will be scrapped.
For further information contact Zaenia Rogers or call on 01962 735350.