VAT AND PROPERTY – SOME CASE STUDIES

Clifton Ingram LLP

15 May 2014

VAT AND PROPERTY – SOME CASE STUDIES

These slides are intended for use in connection with the presentation given on 15 May 2014. No action should be taken on the basis of information contained in these slides or in the presentation without obtaining professional advice specific to the circumstances.

No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these slides or presentation can be accepted by the speaker or by Terry Dockley & Co Limited.

Copyright 2014, Terry Dockley & Co Limited

CASE STUDIES – ISSUES ADDRESSED

• When does a purchaser need to opt to tax?• How and when can the capital goods scheme apply?• What happens on de-registration?• What sort of buyers can stop a vendor from applying an

option to tax?• How the Golden Brick works• Building conversions – what VAT is incurred and can it be

recovered?• How does the option to tax interact with the TOGC rules? • Can you back date an option to tax?• What are the proper limits to TOGC treatment?

CASE STUDY 1

• Sale of industrial unit by engineering company (“A”) in March 2012 for £350k

• Bought in June 2008 for £300k plus VAT

• VAT of £52,500 recovered by A

• A stopped trading and de-registered in June 2011 when property still worth £300k

• Administrator no knowledge of whether A had opted to tax

WHEN WOULD YOU OPT TO TAX?

• You can only recover VAT on costs incurred in making taxable supplies

• If you purchase a commercial building as an investment and the vendor has opted to tax, you will usually want to as well

• If you purchase for use in a taxable trade, you can recover the VAT without opting to tax

• What about on sale?

CAPITAL GOODS SCHEME

• Land and buildings• Specified categories of expenditure• Costing £250k or more plus VAT• Ten-year adjustment period• Tracks changes in use

(taxable/exempt/non-business)• Sales

CASE STUDY 1– DE-REGISTRATION

• Deemed supply on de-registration• No option to tax• So in this case deemed supply was exempt

and 70% of VAT initially recovered repayable to HMRC on final return (£36,750)

• If they had opted to tax, then deemed taxable supply and output tax due on net realisable value (£60k); no adjustment

CASE STUDY 1 - ACTUAL SALE

• As no option to tax, no further VAT consequences

• If they had then opted to tax:– need to re-register and account for VAT on

actual sale price (£70k)– can claim VAT on de-registration of £60k as

input tax

SOME BUYERS WHO CAN THWART AN OPTION TO TAX

Type of building Certificate?

• Dwellings • None, but the vendor should keep evidence of buyer’s expressed intentions

• Relevant residential • As above

• Buildings to be converted into dwellings

• 1614D

• Land sold to a housing association to build dwellings on (after any necessary demolition work)

• 1614G (case study 2)

• Where anti-avoidance applies

• Case study available

CASE STUDY 2

• 2011 entrepreneur buys pub for £500k

• 40% of building is a flat so VAT only paid on 60% of price (£60k) (using rateable values)

• No intention to trade but to do up pub and sell on with same split

• 2012 selling to Housing Association with planning for demolition and rebuild as dwellings

• Purchaser issues 1614G

VAT CONSEQUENCES OF 1614G?

• Exempt sale of property• Claw back of 90% of VAT on purchase and

all of vendor’s VAT on professional costs

SOLUTIONS?

• Sell to a developer who could use the planning permission to build and sell dwellings zero-rated to housing association

• Golden brick it

ZERO-RATED SALES

• First sale of a major interest in a “qualifying building” by “person constructing” is zero-rated

• Qualifying building is dwelling, relevant residential or relevant charitable building

• Zero-rating can apply to sale of partly completed building

• A zero-rated sale is taxable so does not lead to a capital goods scheme claw back

GOLDEN BRICK

• Partly completed building– Must be above

foundation level– Need not be above

ground level– Digging and

concreting foundations alone not enough

• Problem with deposits?

DEPOSITS – PROBLEM?

• No tax point until completion so long as any deposit received as stakeholder

• But does that mean vendor cannot meanwhile access the deposit to fund golden brick works?

• At time of deposit the vendor appears to be selling existing building – exempt not zero-rated

DEPOSITS – THE SOLUTION

• HMRC state that the VAT treatment of the deposit is determined by reference to the anticipated state of the asset at the time of completion

• Contract must make clear that it is a sale of a major interest in a partly completed building rather than of land/existing building

BUILDING CONVERSIONS - QUESTIONS

• Builder buys pub with top floor manager’s flat

• What VAT rate does he pay and what can he recover if– He renovates and sells

one house– He renovates the flat and

turns the pub into a 2nd flat and sells 2 flats

– He turns the pub into 2 houses for sale?

BUILDING CONVERSIONS – “ANSWERS”

• One house – work at 20% (not recoverable)

• Two flats – ground floor work at 5% (recoverable); upper floor at 20% (not recoverable)

• Two houses – all work at 5%– Per HMRC, none recoverable– Per Tribunal – all recoverable (back claims?)

CASE STUDY 3

• Developer buys pub with planning permission:– To convert pub into flats– To build 2 houses in grounds

• Developer fails to sell flats or houses and grants ASTs

• VAT problems?• VAT solutions?

CASE STUDY 3

• Capital goods scheme adjustments for each year of the leases within adjustment period

• Developer should grant major interest in the properties to own company

• His supply zero-rated • Exempt supplies made by company with

minimal input tax• “HMRC approved” VAT planning

CASE STUDY 4

• Company granted a lease on a building in 2008

• It opted to tax the building• In 2012 it sold the building subject to the

lease• Contract drafted on expectation of TOGC• The purchasers did not opt to tax

THE OPTION TO TAX AND THE TOGC RULES

• No TOGC on the sale of a building where vendor has opted to tax unless:– There is a transfer of a business as a going

concern with the purchaser using the asset in the same kind of business as the vendor

– The purchaser is or will become VAT-registered– By completion:

• The purchaser opts to tax• The purchaser notifies HMRC of that option to tax• The purchaser notifies the vendor that the option to tax

anti-avoidance rules will not apply

CASE STUDY 4 – VAT CONSEQUENCES FOR VENDOR

• There is a transfer of a property rental business as a going concern

• Purchaser did not opt to tax, so one of the conditions not met

• Vendor must charge VAT

CASE STUDY 4 – WHAT SHOULD THE PURCHASER HAVE DONE?

• Purchaser should have registered for VAT, opted to tax and notified HMRC before completion so that vendor would not charge VAT

• Failing that, purchaser should have registered and opted to tax before any rent invoices issued. Purchaser could then have claimed the VAT

• Having done neither, did the purchaser have any scope to back date the option to tax?

“BACKDATING” THE OPTION TO TAX

• Option to tax a 2-stage process• Belated notification• What it means• When might HMRC allow it?

– Where VAT has been charged on rents– Not to make a TOGC after the event (but policy

apparently inconsistent)– Not where landlord has refunded VAT

• “Retrospective” option to tax – “illegal”, illogical and not HMRC policy

CASE STUDY 5

• A owns freehold in a hotel • B has an operating lease from

A and runs the hotel• A and B are in common

ownership• C wants to buy the freehold

and run the hotel• How must C structure its offer

to achieve TOGC and limit SDLT if:– A and B are not in a group

registration?– A and B are in a group

registration?

WHAT ARE THE PROPER LIMITS TO TOGC TREATMENT?

• Zita Modes (2003)• Robinson Family (June 2011)• Christel Schriever (November 2011)• Revenue Briefs 30/12 and 08/13

ZITA MODES

• EU VAT Directive allows member states to “de supply” TOGCs

• If member state does so, they can only exclude transfers where transferee is not a taxable person or only acts as such in relation to some of his activities

• Designed to take away burden of VAT where it would be fully recoverable anyway

• Only applies to transfers of business/part of a business and not to asset transfers or transfers with view to liquidation

CHRISTEL SCHRIEVER - FACTS

• CS ran sports equipment shop from her own premises

• Sold stock and fittings to own company as TOGC

• Granted lease on premises to same company for indefinite period but subject to cancellation at short notice

• Tax Office assessed on basis no TOGC because premises an essential component of business

CHRISTEL SCHRIEVER - CJEC

• Referred to reasoning in Zita Modes• Nothing to say successor must own

premises as well as business• Premises may be leased, or successor

may have own premises

ROBINSON FAMILY

• Per 700/9 no TOGC if you grant a lease as it is a new asset• Robinson Family Limited – changed policy• Appellant used Unit 3 as letting business• Unit 3 held on 125-year lease• Appellant could only dispose of business by granting shorter

sublease• Per Tribunal this was TOGC• HMRC now accept TOGC, provided value of asset retained not

more than 1% of total value before transfer• HMRC have now agreed to SDLT refunds• HMRC have still not addressed impact on:

– Property transfers by other types of business– Surrenders

QUESTIONS