VAT on land and property
28th June, 2012
HMRC has recently published a revised version of VAT Notice 742: Land and Property which reflects changes in its interpretation of the law. A copy can be found here – HMRC Reference:Notice 742 (June 2012)
The main changes to note are as follows:-
· Paragraph 2.5 – Definition of licence to occupy land.
Minor changes have been made to the definition of a “licence to occupy land” to bring UK guidance in line with the European legislation in which it is based.
Amendments have been made to the examples of what is and is not a licence for VAT purposes.
For example, the provision of a hairdresser’s chair in a salon and no other service would not be a licence unless a clearly demarcated area is provided (such as a floor or whole salon).
Similarly, granting someone the right to place a free standing or wall mounted vending or gaming machine on your premises is not a licence to occupy land, provided the location is not specified in the agreement.
· Paragraph 3.3 – Freehold sales of new or part completed civil engineering works.
Following the decision in Douglas Virtue & Sonia Virtue (t/a Lammermuir Game Services) v Revenue & Customs  UKVAT V20259, the sale of land containing new civil engineering works that are a minor part of the supply will be an exempt supply (subject to the option to tax). Previously there had to be an apportionment between the land (if exempt) and the civil engineering element (standard rated).
· Paragraph 4.4 – Guidance on the VAT treatment of parking facilities for dwellings.
It is now accepted that the first sale / long lease of a garage or other car parking facility can be zero rated even if sold after a new dwelling provided that:-
(a) the sale / lease is by the same person that constructed the residential unit, and
(b) the garage or other car parking facility is within the “site” of the residential development.
Housebuilders may be able to seek repayment of VAT incorrectly accounted for.
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 provided that:
(a) the garage or parking space is reasonably near to the dwelling, and
(b) the tenant takes up both the lease of the dwelling and the lease of the garage or parking space from the same landlord.
Paragraph 7.6.2 – Temporary Use
This paragraph notes the restriction on the recovery of VAT that applies from 1 January 2011 in respect of land and buildings that are to be used for a temporary period for a private or non-business purpose. VAT may only be recovered on the proportion of VAT that relates to your business taxable supplies.
Paragraph 7.8. – Treatment of land and buildings on hand at deregistration.
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.
The detailed set of circumstances in which you will have to account for VAT are set out in this paragraph.
Paragraph 10.11. – VAT treatment of landlord’s contributions to tenant’s costs
The guidance has been updated following the decision of the European Court of Justice in Commissioners of HM Customs & Excise v Mirror Group Newspapers (C-409/98). Where the prospective tenant does nothing more in return for such a payment than undertake to become a tenant and to pay the rent due under the lease, this will not, of itself, constitute any type of supply by the tenant to the landlord. It will therefore be outside the scope of VAT.
There may, however, be exceptional circumstances where the tenant does make a supply to the landlord and the incentive payments become vatable. For example, the tenant could agree to carry out:-
(a) building works to improve the property by undertaking necessary repairs or upgrading the property, or
(b) fitting out or refurbishment works for which the landlord has responsibility and is paying the tenant to undertake.
Where the tenant acts as an anchor tenant and an incentive is paid for this, the payment may be vatable.
If you have any queries regarding VAT on land and property or other commercial property issues contact Emma McGlinchey at [email protected] or on 01244 405567.