Case Study

Changes to VAT Rules

Monday 15th September 2008

 

Since 1st June 2008 there have been new VAT rules concerning the option to tax. The sale of commercial property and land is not usually subject to VAT unless the seller chooses to apply VAT to the property - opting to tax.  In those circumstances the purchaser must pay VAT on the purchase price. The new rules confirm that an option to tax can be ineffective in certain circumstances. The main change for purchasers to note is that the option to tax is ineffective (and therefore no VAT Is payable on the purchase price) if a certificate is served by the purchaser stating that either:-

 

(1) the purchaser is to convert a non-residential property to residential use; or

 

(2) the purchaser is a Registered Social Landlord and intends to build new housing on the land.

 

How does this affect purchasers?

When purchasers buy land or commercial property they may find that the seller has opted to tax the property. If VAT has to be paid on the purchase price the purchaser may not be able to obtain grant funding to pay for this, or if they are not VAT registered they will not be able to recover it. The new rules confirm that VAT does not require to be paid if the purchaser is able to give the seller one of the pro forma certificates applicable.

  

New Certification process

There are 2 certificates available.  One certificate should be issued if the intention is to convert a non-residential building into a residential one. The other certificate should be issued if the purchaser is a Registered Social Landlord and they intend to construct new residential properties on the land purchased.

 

1.      Change of use to residential

A certificate can be issued if:

(1) The building, or part of it, is to be used as a dwelling or solely for residential purposes, or

(2) The intention is to convert the building, or part of it, to a dwelling or use it solely for residential purposes or

(3) If the recipient is a ‘relevant intermediary' - the purchaser intends to sell the property to someone else who will provide a certificate confirming that they intend to convert the building into a dwelling or use it for residential purposes.

 

The style of Certificate (VAT 1614D)   which must be used can be found at:

www.hmrc.gov.uk/forms/vat1614d.pdf

 

2.  RSLs constructing residential properties

A certificate can be issued if

  • (1) The purchaser is an RSL within the meaning of the Housing (Scotland) Act 2001; and
  • (2) after any demolition work, dwellings or relevant residential buildings will be constructed on the land.
  • (3) The style of certificate (VAT 1614G) which must be used can be found at :

www.hmrc.gov.uk/forms/vat1614g.pdf

 

Timing of issue of Certificate by purchaser

The certificate must be given to the seller before the price is legally fixed i.e. before the conclusion of missives. If the Certificate is received after that time it can still be accepted at the seller's discretion, provided the transaction has not completed.

 

Summary

When agreeing the price for the purchase of property, the purchaser should clarify if the seller has opted to tax the property. In these circumstances the purchaser may be able to issue a Certificate to the seller which disapplies the option to tax so that the purchaser does not pay VAT. The certificate must be given to the seller before the conclusion of missives.

  

If you would like any further information on the issues raised in this briefing contact

Alison Thompson

on 0141 225 2589 or amt@tcyoung.co.uk

 

Please note that this briefing is a short summary of the new regulations as at July 2008 and is not a comprehensive statement of the law. Legal advice should be taken on individual circumstances