Firm foundations: VAT and property investment

Recent rulings and moves by HMRC have muddied the waters when it comes to property matters. Melanie Lord explains all;

Given that investing in property isn’t exactly a new idea, lots of people dabble and think they know how to handle associated VAT. For a long time, thanks to a fairly static situation, they might have been right; however, it’s now looking as though those days are behind us. A worrying trend emerging from recent cases in the VAT tribunal and changes to the law point towards the concrete VAT rules we thought we knew being slowly undermined. The VAT net is spreading ever wider.

Payments related to ‘vanilla’ residential lets and sales have always been VAT exempt, and it’s very unlikely that will ever change. Where changes are seeping in is around some of those ‘non-vanilla’ situations where the VAT treatment isn’t always easy to interpret. Often the rent or sale might be VATable or it might be exempt; depending partly on the age of the building and partly on what the owner has decided to do about their own VAT. These rules are confusing when you first encounter them but they are now pretty settled.

Despite the VAT rules for property often being clear cut, they are still very complicated. As a result, we still see self-inflicted injuries due to VAT not being thought about soon enough, which is always very sad. Then there are situations where the ground is less certain, and as a result the VAT treatment is less clear cut. For these, like any other property transaction, they really are worth thinking about well in advance.



Making assumptions

I talk to a lot of people who just know that property rent is VAT exempt and don’t stop for a second to think about it. While sometimes this is correct, this is also where we’re seeing interesting developments, so it’s time to stop and start asking questions.

These emerging uncertain situations mainly involve licences to occupy land rather than formal leases, with many of the issues seeming to stem from the temporary nature of the letting. Over time, HMRC have succeeded in shrinking the type of lets that can be included in the VAT exemption for land related activities. Examples include:

  • Hairdressers commonly rented chairs, which led to numerous arguments about whether a licence to occupy had ever been granted. The rules were changed in 2012 so that VAT applies unless it is a clearly demarcated area, with no other services supplied.
  • Vending machine rents received for having a machine on your premises used to be VAT exempt, but are now VATable as the supply was held to not provide for proper rights of occupancy.
  • Exhibition stalls might still be exempt if the supply is strictly just space for a stand. VAT would apply if any additional services are included and HMRC are looking closely for other add-ons as evidence of these additional services.
  • Pitch rent at craft and other fairs used to be partly exempt, but is now treated as part of an overall supply of being allowed to participate in an organised event. The inclusion of additional services moved this away from a supply over land and made the whole thing VATable.
  • Storage facilities were being treated as VAT exempt, but the rules changed in 2012 so that VAT applies unless a person is allocated a specific area over which they have a right to occupy as if they are the owner.
  • Some confusion remains around party and wedding venues, but VAT would seem to be applicable unless the only thing being supplied is a room, which for a wedding means the ceremony room. Again, the addition of any other facilities pushes the entire supply into being VATable, so that any party or wedding venue needs to be aware they are at risk of having VAT imposed.

HMRC are actively looking for other situations where a charge is for more than a ‘key to a door’ letting. Given that having a wedding licence has influenced the VAT outcome for wedding venues, HMRC are looking at other situations, for example where there is an entertainment licence, and questioning whether exemption is applicable. In one situation HMRC focused on the availability of a kitchen as evidence of the supply being more than a licence to occupy and argued that VAT fell due.

This is clearly an area to watch out for. The emerging trend is that VAT should be charged if any additional services, no matter how small, are included. Any situation that involves charging exempt rent or a licence fee now needs to be looked at carefully. This is especially so where HMRC can point towards the arrangement including something extra as they can use this to argue that the income is actually VATable and not exempt.

  • Melanie Lord, Director of AVS VAT

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