Simplifying VAT on Land and Property?

Property Tax Bite – Simplifying VAT on Land and Property?

There is no doubt that the VAT treatment of land and property is complex. Starting from the most basic statement, set out in the legislation, that interests in land are exempt from VAT, the exceptions to that rule come thick and fast, and that is before considering zero-rating and reduced rating of certain supplies, and exceptions to the exceptions such as the rules around disapplication of the option to tax.

The complexity is generally acknowledged, but at the same time it is acknowledged that doing something about it will not be straightforward. Or at least that any purportedly simple fix would have significant implications and potentially heavy losers in terms of increased irrecoverable VAT costs.

In 2017 the Office of Tax Simplification investigated a few possibilities for simplification, including removing the option to tax and making all property supplies exempt, or all VATable, or all VATable subject to an option to exempt (as opposed to the current option to tax). As the OTS noted at the time, however, such sweeping changes would have significant implications for some taxpayers and would involve a lot of unpicking of the current system.

In May of this year, the government launched a new call for evidence on this subject, and responses are invited by 3 August. The paper acknowledged the difficulties faced by taxpayers in applying the rules, and keeping track of things like options to tax, noting that HMRC does not keep records of all options made.

The call for evidence includes three new suggestions for views and comments, whilst emphasising that other suggestions are welcome. They are:

• Making short-term or minor interests in land automatically subject to VAT;

• Making all land-related supplies VATable subject to specific defined exemptions (e.g. for residential accommodation); and

• Linking VAT liability to the Land Registry – although it is not clear how much of a simplification this would be as the paper acknowledges there would need to be certain exceptions, and would leave issues over unregistered or unregistrable interests.

For now, for property lawyers it is largely a case of watch this space, and any reform (if any) is likely to be at least another Finance Bill or two away. However if you or your clients have any particular issues or thoughts on the complexities of the VAT treatment of land and property, the more responses to the call for evidence the better the final outcome is likely to be. And of course in the meantime, we are here to help with any issues on your matters, so please do get in touch.

Posted on 31/01/2022 in Property Tax News


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