VAT LIABILITY AND THE IMPLICATIONS OF COMMERCIAL PROPERTY TRANSACTIONS ppt

A SPECIALLY COMMISSIONED REPORT VAT LIABILITY AND THE IMPLICATIONS OF COMMERCIAL PROPERTY TRANSACTIONS Tim Buss AITT THOROGOOD PROFESSIONAL INSIGHTS THOROGOOD PROFESSIONAL INSIGHTS A SPECIALLY COMMISSIONED REPORT VAT LIABILITY AND THE IMPLICATIONS OF COMMERCIAL PROPERTY TRANSACTIONS Tim Buss AITT Thorogood Publishing Ltd 10-12 Rivington Street London EC2A 3DU. t: 020 7749 4748 f: 020 7729 6110 e: info@thorogood.ws w: www.thorogood.ws © Tim Buss 2005 All rights reserved. No part 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. This Report is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired out or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than in which it is published and without a similar condition including this condition being imposed upon the subsequent purchaser. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author or publisher. A CIP catalogue record for this Report is available from the British Library. ISBN 1 85418 307 9 Printed in Great Britain by printflow.com 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 contact Thorogood by telephone on 020 7749 4748, by fax on 020 7729 6110, or email us: info@thorogood.ws DEDICATION To my family and in memory of Peter, my dad and Joan, my mother in law. THOROGOOD PROFESSIONAL INSIGHTS 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 advises clients on all aspects of VAT. Tim has represented clients at VAT tribunals including SEH 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 new commercial 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 respon- sibility for the Institute’s examinations. Tim regularly writes on a range of VAT issues. He lectures and presents workshops for a number of organizations including the Association of Accounting Techni- cians, Institute of International Accountants and IBC Global Conferences. Contents 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 THOROGOOD PROFESSIONAL INSIGHTS 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 CONTENTS THOROGOOD PROFESSIONAL INSIGHTS 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 CONTENTS THOROGOOD PROFESSIONAL INSIGHTS 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 CONTENTS THOROGOOD PROFESSIONAL INSIGHTS Introduction VAT and property – a marriage made in Europe Most people can remember where they were when news broke of a world- shattering event, e.g. the assassination of President Kennedy or the death of Princess Diana. As testament to a ‘sad life’ as a VAT consultant, I can remember precisely where I was on 21 June 1988 (in my car and on my way to address a meeting of the West Wycombe Women’s Institute) when the European Court 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 1 April 1989. The main areas of change were as follows: • Zero-rating for new construction was restricted to dwellings and buildings for a relevant residential purpose (RRP) or a relevant charitable purpose (RCP). • Zero-rating for approved alterations to listed buildings was similarly restricted 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 works became standard rated. The option to tax was introduced; however, the option to tax rules did not come into effect until a few months later on 1 August 1989. Significantly there were no anti-avoidance regulations introduced in connection with the option to tax facility. 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, particularly the Halifax case (see Chapter 9). This report deals with the complexities of UK and EU legislation, and provides an overview of the implications of commer- cial property transactions. Residential property transactions are not within the 1 THOROGOOD PROFESSIONAL INSIGHTS [...]... supply takes place As far as property is concerned the place of supply is the UK if the property is located in the UK The UK includes England, Scotland, Northern Ireland, Wales and the territorial 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 does not extend to the Channel Islands Taxable person A taxable... buildings and parts thereof and land on which they stand’ The supply before occupation of buildings or parts of buildings and the land on which they stand is specifically excluded from the exemption This exclusion therefore provides that the supply of new commercial buildings is liable to VAT Land Land is subject to a separate exemption under Article 13B (h) which exempts the supply of land which has not... Herr Maierhofer had no interest in the land on which the buildings stood The ECJ, when giving its judgement, said that it was irrelevant whether the letting was of both the land and the building, or of just the building built on the lessee’s land; it was enough for the property to be immovable The UK’s view remains that the lessor does need an interest in the land to come within the exemption The ECJ... rate of 5% and a zero rate (nil %) which applies to certain goods and services The zero rated goods and services concerned are listed in the VAT Act 1994, Schedule 8, and those at the lower rate are specified in VAT Act 1994, Sch 7A In addition, other supplies are exempt from VAT (VAT Act 1994, Schedule 9) and others are outside the scope of UK VAT Scope of VAT In order to fall within the scope of UK VAT. .. the subject of a number of disputes between taxpayers and Customs There was an important victory for the taxpayer in the case of Barbara A Ashworth (LON/94/221) The appellant owned a long lease in a waterside lodge at a Marina The lease prohibited occupancy of the lodge during the month of February The appellant occupied the lodge as her home for the rest of the year The VAT tribunal decided that the. .. 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 building until three years after the earlier of the certificate of practical completion or first full occupation In the case of a civil engineering work the standard rate applies to all sales within three years after the earlier of the certificate of completion... 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 Chapter 1 VAT general principles In order to appreciate the VAT implications of property transactions it is necessary to be aware of certain basic principles of the tax The VAT regime VAT. .. terms a supply of goods occurs when the ownership of the goods is transferred The freehold sale of a property is therefore a supply of goods 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 of services is outside the scope of VAT, generally referred to as non-business Place of supply There are complex... 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 to the European Court THOROGOOD PROFESSIONAL INSIGHTS 22 3 LAND AND LICENCE TO OCCUPY LAND 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 to the. .. after the date of completion, occupation (building) or use (civil engineering work) is exempt, subject to the option to tax THOROGOOD PROFESSIONAL INSIGHTS 20 3 LAND AND LICENCE TO OCCUPY LAND Scope of the exemption for land and buildings The exemption covers land and anything fixed to the land However, exemption does not necessarily apply to the sale or letting of loose items In exempting the supply of . is the UK if the property is located in the UK. The UK includes England, Scotland, Northern Ireland, Wales and the territorial waters of the UK. The Isle of Man, whilst not strictly part of the. fixed to the land. Supply of buildings Article 13B (g) exempts the supply of buildings and parts thereof and land on which they stand’. The supply before occupation of buildings or parts of build- ings. overview of the implications of commer- cial property transactions. Residential property transactions are not within the 1 THOROGOOD PROFESSIONAL INSIGHTS scope of the report with the exception of