Simplification of the VAT exemption for land and property
HMRC has published a call for evidence on options to simplify the VAT exemption for land and property. This follows a review by the Office of Tax Simplification (OTS) which included recommendations for the simplification of the VAT treatment of land and property. Any businesses interested in responding to HMRC’s suggestions, or making their own, have until 3 August 2021 to respond. haysmacintyre is in the process of drafting a response and include below our initial thoughts.
Current issues and complexities
There is no question that the current VAT rules in respect of land and property are complex and difficult to follow for many businesses. The starting point of course is that the supply of land and property is exempt from VAT, but there are several exceptions to this which have been added to the VAT legislation over time, such as different rules for parking, storage, holiday accommodation and recreational activities. These exceptions can result in businesses spending additional time and money on determining the VAT treatment to be applied to their supplies.
In addition, there is the option to tax which can be made over land and property and the complexity around this. For example, there is no facility whereby a business can check to see whether a property has been opted by the seller which can lead to additional costs and unexpected delays in completing deals. Furthermore, there is the possibility of the option to tax being disapplied in certain circumstances which creates further confusion, as well as the impact that this can have on Capital Goods Scheme calculations.
It is therefore clear that some simplification to the current system would be welcome, but HMRC will need to tread carefully in the adjustments that they make.
Previously suggested options
The review by the OTS published in 2017 highlighted several potential options for simplifying the VAT treatment of land and property, though each of these were rejected in the same report. One of the options identified was removing the ability to opt to tax so all transactions would be exempt from VAT. Although the benefit of this approach would be to simplify the position, in practice this would lead to businesses suffering irrecoverable VAT on construction costs and other costs.
Alternatively, the OTS considered the reverse position and making all land and property taxable at either the reduced rate or at the standard rate with an option to make the supply exempt. The former option would simplify matters, but the latter is simply a mirror of the current position. In practice, this would result in potential increased costs to consumers, not to mention the difficulty in unpicking the existing system.
With each of the three options highlighted in the OTS report there would also be implications for businesses where, for instance, there are assets which are currently within the Capital Goods Scheme, as removing the ability to opt could lead to significant repayments due back to HMRC.
As part of the call for evidence, HMRC have presented some new possible simplifications and have asked businesses to comment on these.
One option they are considering is to define short term or minor interests as being subject to VAT. The reason given for this suggestion is to try and combat scenarios where essentially identical land transactions are being treated differently for VAT purpose due to taxpayers having different interpretations of the legislation. For example, when does a supply of an area in an office become more than just an exempt supply of land and becomes a taxable supply of facilities?
If all short term lets were deemed to be taxable this would ensure that there was a consistent approach being applied to all such lettings and would remove the ambiguity in this area. Of course, there would need to be a clear definition of what constitutes a short term letting so consideration will need to be given to this. This could also create issues. For example, if all short-term lets became taxable this could create a requirement for a business to register for VAT when previously they were not required to. The example that comes to mind here is a school which lets its grounds over the summer. If all short-term lets became taxable this would result in the school having to register for VAT which would cause a significant administrative burden. Similarly, a Church Hall used by mother and toddler groups or Pilates classes could give rise to the need for parish churches to register for VAT. Perhaps a better idea might be for HMRC to set out exactly what can be supplied alongside land, without turning a supply into a supply of taxable facilities.
As with the OTS suggestions detailed above, it would be interesting to see how this simplification would be implemented and whether it would impact the historic VAT recovery position for businesses.
A further suggestion within the call for evidence document is to make most supplies of land and property subject to VAT and exempting specific supplies. This would essentially remove the option to tax legislation because all supplies would be subject to the standard rate of VAT, unless specifically exempted. You would expect that the exemption would continue to apply to residential property and charitable buildings so that this simplification would not result in increased cost to residential tenants and charities and would once again provide some consistency to the position.
Although this approach looks to be quite a good option, once again, the potential issue would be forcing businesses to register for VAT who otherwise would not need to be registered. Furthermore, this could have a significant impact on existing lettings which may currently be exempt from VAT but would become taxable. Businesses impacted by COVID-19 could also suffer further financial burden by having to then pay VAT on their rents, for example. In many cases, the end user would be able to recover the additional VAT charged but if the tenant is not a fully taxable business, such as tenants involved in providing insurance or financial services, tenants may try to break their leases due to the change in VAT treatment. Such an approach also removes all flexibility for landlords.
The third option put forward is to put in place a mechanism which links the VAT liability to the Land Registry. For instance, it could be decided that any interest registered in a Land Register would be exempt from VAT, while any that are not registered in a Land Register would be taxable, or vice versa.
The benefit of this simplification is to again provide a degree of certainty of the VAT liability of a land transaction as there would be a publicly accessible record, but this would also remove the flexibility that is currently available and we come back to some of the disadvantages of the other simplifications detailed above. There could also be issues where the land that is opted is on multiple different titles, or where only part of a title is opted. A simpler solution would be for HMRC to make the details they have of who has opted, what they have opted and the date an option is made public. This could commence for all new options notified to HMRC and be gradually backfilled, and it might be possible to link to the VAT registration checker which was created as a result of Brexit.
Although there are clear benefits to the simplification proposals put forward by HMRC, there are also disadvantages which will need to be considered. The current system does have a degree of flexibility which can be a disadvantage but is also beneficial to many in the Property industry, so it would be concerning if this flexibility was removed completely.
It seems that one measure that could be implemented is to produce some form of accessible record of the land and properties that have been opted and by who. Although this would be a significant task, as HMRC’s records may not be complete, it would be extremely useful in the Property industry in giving assurances about whether VAT is due to be charged on any purchase.
We are in the process of forming a response to send to HMRC and would encourage anyone with comments or thoughts to do the same to avoid unwelcome changes being forced upon the industry. In the meantime, should you have any queries or wish to discuss any aspects of the above further please do not hesitate to contact Stephen Patey, Senior VAT Manager.