The VAT treatment of property transactions is generally perceived to be a very complex area of the tax. In this article we have provided an overview of the VAT treatment of construction/conversion services and the sale of land and property for both residential and commercial buildings. However, the information set out below is high level and we recommend that specific property VAT advice should be sought due to the complexity of the rules and the high values involved.
VAT on Construction Services – Residential Property
Within the UK VAT at 20% is generally applied to the supply of construction services. However, there are a number of VAT reliefs available for certain types of construction or domestic property development (renovation/conversion works):
The 0% rate of VAT will apply to the construction of new “dwellings”.
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.’
If these conditions are not met, then the construction services will be liable to VAT at 20%. Only the actual construction work is zero rated and other services related to the property are excluded as follows:
- Professional services e.g. architects (unless provided under a single design and build contract)
- Goods on hire e.g. plant/machinery
Zero rating applies to both the construction services and the supply of certain building materials which are installed by the building contractor. HMRC’s Notice 708 provides a list of which items qualify as building materials and can be zero rated and which do not. Generally speaking the materials need to be incorporated into the building for zero rating to apply.
Energy Saving Materials (“ESM”)
With effect from April 2022, the installation of certain qualifying ESMs in (or in relation to ‘residential accommodation’) is subject to a temporary zero-rate until 2027 when the rate will revert to the previous 5% reduced rate. ESMs include;
- insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings
- draught stripping for windows and doors
- central heating system controls (including thermostatic radiator valves)
- hot water system controls
- solar panels
- wind and water turbines
- ground source heat pumps
- air source heat pumps
- micro combined heat and power units
- boilers designed to be fuelled solely by wood, straw or similar vegetal matter
Residential and charitable buildings
VAT Zero rating also applies to the construction of certain other types of residential building e.g. care homes, student accommodation (known as relevant residential purpose (“RRP”)) and certain buildings used by charities for non business purposes (known as relevant charitable purpose (RCP)). In order to obtain zero rating for these types of buildings, the contractor will need to obtain a certificate from their customer to confirm the building will be used for a qualifying purpose (RRP or RCP). Any change in use of these buildings within 10 years of completion may result in a VAT charge to the user if the new use is non qualifying use.
Zero rating also applies to certain construction works for use by disabled persons, e.g. ramps, door widening, bathrooms etc. A detailed list of qualifying works is set out in HMRC’s Notice 701/7.
There are also special rules for certain conversions for Housing Associations.
Reduced VAT Rate and Residential conversions/alterations
Unless a relief applies, conversion, alteration or refurbishment work on a residential property is standard rated. However the lower VAT rate of 5% applies to certain residential conversion works:
- this includes residential property which has not been lived in for at least two years prior to the work commencing. Evidence will need to be obtained to prove the “empty homes” status;
- the 5% reduced VAT rate also applies to residential conversions which involve a changed number of dwellings e.g. a house being converted into flats and vice versa. The rules here are complex and specific advice should be taken from a property VAT specialist.
Do it yourself VAT refund Scheme
There is a VAT refund scheme for DIY housebuilders who are building new homes for their own private occupation or constructing a new charity building, for a charitable or relevant residential purpose.
The scheme allows VAT recovery on qualifying building materials only. This puts individuals in the same position as a business constructing a new dwelling who would benefit from zero rating by the contractor. There are specific time limits and documents needed (e.g. planning permission etc) to be submitted with the form or online via the Government Gateway account.
Domestic Reverse Charge (“DRC”)
The DRC was implemented with effect from1 March 2021 as an anti-avoidance measure in the construction industry. It is aimed at preventing VAT being charged and collected but not remitted to HMRC. It works in conjunction with the Construction Industry Scheme (“CIS”) which is also an anti- avoidance scheme for direct tax.
The DRC applies to any building contractor who is both VAT registered and CIS registered. If the services provided fall within the CIS, the contractor does not charge VAT on his invoice for construction services, instead the customer accounts for the VAT due under the reverse charge procedure and recovers this on the same VAT return in accordance with the normal VAT recovery rules. However, the DRC does not apply to the end user e.g. the consumer who employs a contractor to undertake works to which VAT applies (either 20% or 5%). In this case, VAT is chargeable in the usual way by the contractor. These new provisions are fairly complex and business impacted need to put processes in place to ensure that the rules are applied appropriately. Specialist property VAT advice should be taken for areas of uncertainty
VAT and the Sale of Land or Property
As with construction services above, there are complex VAT rules in respect of the sale of land and property.
The supply of land is typically VAT exempt but with some exceptions – see below under “Buildings” section.
Land includes any buildings, civil engineering works, walls, trees, plants and any other structure or natural object in, under or over it as long as they remain attached to it.
Supplies of land include the grant of an interest in, right over or licence to occupy land in return for a payment or ‘consideration’:
- Interests in land include surrenders and assignments;
- Rights over land include easements, wayleaves, rights of entry etc;
- A licence to occupy exists where there is a right to occupy a defined area on an exclusive basis, for an agreed period of time, e.g. the provision of a specific area of office accommodation, such as a bay, room or floor, together with the right to use shared areas such as reception, lifts, restaurant, rest rooms, leisure facilities etc.
There are special rules for free supplies e.g. gifts of land/property which are not covered here but specialist property VAT advice is recommended.
The sale of, or lease of, a building can be zero-rated, standard-rated, exempt from VAT or outside the scope of VAT depending on the circumstances.
(The law is set out in Schedule 9, Group 1, VAT Act 1994). This provides for VAT exemption for the sale of building, but there a number of exceptions to the VAT exemption, including the supply of;
- Hotel and holiday accommodation – standard rated
- Parking – standard rated
- moorings/pitches for camping – can be standard, zero or exempt
- Sporting rights/letting of sports facilities – exempt for certain supplies
- Freehold sales of new/partly completed commercial buildings (less than 3 years old) – standard rated
- Freehold sales and long leases in dwellings and other residential buildings (RRP/RCP) – zero rated subject to certain conditions being met
- Transfer of going concerns – outside the scope of VAT if the conditions are met
- Non residential buildings converted to new dwellings/relevant residential buildings (RRP/RCP) – zero rated. (Non-residential buildings include residential buildings that have not been lived in for at least 10 years)
Each of the above categories has specific and detailed rules regarding the correct VAT treatment.
Option to Tax
This is also known as an Election to Waive Exemption. The supply of land and/or commercial property which would otherwise be VAT exempt, can be subject to VAT if the owner opts to tax their interest in the property. The option to tax does not apply to residential property. (The law is contained in Schedule 10, Para 2, VAT Act 1994. Guidance in HMRC Notice 742A).
Once opted to tax, all supplies of the property including rent and future sales, are liable to VAT at 20% and the option is generally irrevocable for 20 years, with a few minor exceptions. An option to tax may affect the marketability of a property if the tenant or buyer is unable to reclaim VAT on rent/sale price (e.g. a bank). As such, the decision to opt to tax is a significant one for any business. Landlords entering into leases of tenanted property should ensure the lease allows for VAT to be added to the rent rather than the rental value being deemed to include VAT.
The advantage of opting to tax is that VAT on costs related to the property is recoverable in full, e.g. a landlord may undertake an office refurbishment and the VAT incurred on the cost of this would be a significant cost if he didn’t opt to tax the building as the leasing out of the building would be VAT exempt. Input tax may be restricted under the rules for partial exemption.
An option to tax is a two step process : firstly making a decision to opt and secondly notifying the option to tax to HMRC. If the business has previously made exempt supplies of the property, permission may be needed from HMRC prior to opting, although there are a number of scenarios where permission is automatically granted. An option must be notified to HMRC within 30 days of being made on form 1614A. it is not possible to backdate an option to tax.
HMRC will send an email acknowledging receipt of the option to tax. This email should be kept safely as proof of an option to tax being made. In our experience, many businesses involved in sales of property do not know if there is an option to tax in place and this makes the sale process more difficult than it should be, particularly if there will be a Transfer of a Going Concern (see below).
Option to Tax Disapplication Rules
These are very complex anti avoidance rules which mean that certain options to tax, even if made, will disapply in practice an in those cases the supply will revert to being VAT exempt, impacting VAT recovery on costs.
In general terms, these rules apply to certain supplies to charities and where there is exempt use of a building, connected parties and the property is within the Capital Goods Scheme (“CGS”). The CGS applies to any property on which VAT is paid and the value is £250,000 or more (it also applies to property refurbishments costing more than £250,000). The CGS runs for 10 years from the date of purchase or the date of first use of the refurbished property.
Transfer of a Property Business as Going Concern (TOGC)
For VAT purposes, the sale of a commercial tenanted property is treated as the transfer of a property letting businesses and as such, the sale may be VAT free under the TOGC rules, even in cases where the seller has opted to tax his interest in the property. There are additional TOGC conditions for property which has been opted to tax. The benefit of TOGC treatment is that the sale is outside the scope of VAT. This provides a significant cashflow advantage but more importantly, Stamp Duty Land Tax is calculated on a VAT inclusive basis. Therefore, TOGC treatment will reduce the SDLT payable. Where land or buildings transfer as part of a wider TOGC of any business, if the vendor has opted to tax the land/property, the purchaser must also opt and notify HMRC prior to the transfer. The vendor solicitors are likely to ask for evidence that this has been actioned by the purchaser as it impacts on the availability of the outside the scope VAT relief for the TOGC.
Other Property VAT Issues
Property transactions give rise to a number of very specific VAT issues and the most common areas of difficulty we come across are:
- Determining the taxable person to be VAT registered e.g. scenarios involving joint owners, oint ventures, limited partnerships, beneficial interest holders
- Supplies between landlords and tenants – e.g service charges, rent free periods, inducements, lease variations etc
- Managing agents
- Barter transactions
- Supplies involving VAT groups
- Timing and notifications of options to tax
- Overage payments
This article only scratches the surface of the depth of detail within the VAT legislation and guidance for land and property.
The VAT treatment of land and property transactions is complex, subject to frequent change due to a significant amount of litigation, changes in VAT legislation or HMRC policy.
We recommend that any business involved in property matters should seek advice from a property VAT specialist on a timely basis ie well before a property transaction is due to complete.
As can be seen from the above there are many issues to consider in relation to land and property VAT and The VAT Consultancy is well placed to assist, being a land and property VAT specialist with over 20 years experience in providing property VAT advice to businesses and their advisors.
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Whether you’re a land owner, property developer or provide construction services, our team is dedicated to assisting you in navigating land and property VAT.
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