Land Promotion Agreements and hidden VAT charges – Iain Masterton discusses

Chiene + Tait VAT Director Iain Masterton is featured in the most recent LandBusiness magazine discussing the VAT treatment of Land Promotion Agreements (LPAs).

Iain conveys the attractiveness of rural land development to property developers – and how, in turn, this enables landowners to enter into LPAs with promoters when they wish to maximise their income. LPAs can be arranged in different ways so that the partnered promoter can aid the landowner with their return of the sale without the added pressure of obtaining planning permission or finding a buyer. As these agreements are flexible – and can be in place for many years – it is essential that landowners understand their VAT position so that the end VAT cost does not surprise them when the sale ultimately ends.

Iain confirms that it is important to understand what the LPA originally says. Often there is an initial understanding by the landowner about the right over land. This depends on if the land is opted to tax. If it is not, then the grant of any right over the land is exempt from VAT. However, for there to be a right over land, the agreement must make it clear that that is exactly what the promoter is acquiring. In some cases, the promoter is in fact not receiving the right to the land but instead an exclusive right to promote the land in question. This is a taxable supply of services. Due to this technicality, VAT errors can occur for landowners who have already received introductory or extension payments.

When a promoter is involved, they will be acting as an agent and therefore will charge a commission which will be subject to VAT. This would be non-recoverable to the landowner if the sale did not go through. This can be avoided if the land is taxed prior to the sale as the VAT could be recovered on the promoter’s commission and any other legal fees associated with the sale.

Iain concludes by stating that LPAs are beneficial to both landowners and potential buyers – as this can maximise returns and sell the land at an optimal time for both landowner and developer.  He would recommend, however, that the VAT aspects of these agreements are considered fully to ensure that there is no tax loss to landowners.

 

To read the full article click here.

Recent VAT cases for Rural Businesses

Chiene + Tait’s VAT Director Iain Masterton runs through some recent VAT cases that impact on the rural business sector. If you have a query about VAT, please feel free to contact us today.

Brexit

The implications of Brexit are still being debated and nothing is yet certain, though it seems that VAT, the ‘European’ tax, will still be with us for some time. Brexit will be felt by businesses that
currently trade with the EU (especially in goods), however the UK (or Scottish) Government may be free to change elements of the VAT system without having to adhere to European VAT Directives. For farms and estates, we do not envisage any major changes, at least for now.

Room Hire

HMRC won a VAT Tribunal against a hotel which confirmed that VAT was due on the hire of a room for a civil wedding ceremony, even where there was no option to tax in place.
The hotel had considered that its income from renting out the rooms for events was VAT exempt. The hotel operated under the Marriages & Civil Partnership (Approved Premises) Regulations 1995, which made it clear that the hotel provided a number of services rather than just the passive hire of a room (which are the hallmarks of a lease or licence to occupy). The Tribunal agreed that the resulting ‘service’ was subject to VAT. HMRC also consider that the supply of a room in a venue is subject to VAT if the purpose of the hire involves catering, whether this is provided by the venue or a third party. This includes receptions, breakfasts and birthday parties; and it will now include rooms for wedding ceremonies too. This differs slightly from HMRC’s policy on conferences where day delegate rates at venues can be treated as exempt (if no option to tax is in place). Long-stay delegate rates that include board and accommodation can be apportioned.

Conversions

An area where the UK Government might still provide VAT incentives is residential property. If you rent out residential property, this will be VAT exempt and any VAT incurred on renovations or repairs to these buildings is likely to be irrecoverable. Three VAT concessions exist currently which reduce the VAT cost on residential renovations by 15% to 5%. These are:

  • Renovation of a residential property which has been empty for 2 or more years
  • Renovations which change the number of dwellings after completion, and
  • Conversion of a non-residential property into residential.

If you are considering renovating existing residential properties, or converting steadings or old agricultural buildings, knowing where these VAT reductions apply can reduce the amount of irrecoverable VAT on residential property renovations. This should be established at an early stage to ensure budgets are accurate.

Cars, Vans & Agricultural Vehicles – VAT recovery?

VAT recovery depends on whether there is any private use of the vehicle and the vehicle design. VAT is irrecoverable if the vehicle meets the car ‘tests’ and if there is any private use. The following are not cars for VAT purposes:

  • Vehicles capable of accommodating only 1 person or suitable for carrying 12 or more people including the driver
  • Vehicles that don’t have roof accommodation to the rear of the drivers’ seat
  • Caravans, ambulances and prison vans
  • Vehicles of not less than 3 tonnes unladen weight
  • Special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans, and breakdown and recovery
  • Vehicles and vehicles with no side windows
  • Vehicles with a payload of 1 tonne or more.

We are seeing more vehicles with payloads of more than 1 tonne not being treated as ‘cars’ which allows a more favourable VAT treatment where there is private use. If you can demonstrate that the car is being used 100% for the business, the VAT is fully recoverable, assuming the business is entitled to full VAT recovery.

The VAT rules allow 50% of the VAT on a lease to be eligible for recovery, even where there is private use. As above, where the vehicle is not used for any private purposes the 100% of the VAT on the lease can be recovered.

Have a question about VAT, get in touch with Iain at mail@chiene.co.uk or call 0131 558 5800.