Rather than wholesale reform of the rules, we need greater clarity and consistency from HMRC.
HMRC has launched a call for evidence seeking views on the current VAT rules relating to land and property and exploring potential options for simplifying them. This would appear to be driven by Brexit now that the UK is freer to extend or reduce the scope of the exemption from VAT.
What reforms are being considered?
This exercise seems willing to leave all options on the table, including:
making all land transactions exempt;
making all land transactions taxable at a reduced rate;
making all commercial land taxable, with an ‘option to exempt’;
automatic taxable status for some ‘minor’ classes of interest; and/or
more outlandishly, automatic taxable status for property registered at HM Land Registry (HMLR).
Is reform needed?
In my view, a wholesale refactoring of the VAT land exemption is unnecessary. Reform will create a parallel set of laws and necessitate transitional provisions which will add complexity.
Any move to a blanket exemption or reduced-rating will hit some sectors of real estate, and operators, disproportionately harder than others. As with the self-storage rule changes in 2012, the spectre of state aid questions could loom large.
Reversing the polarity of the option to tax into an ‘option to exempt’ will confuse the whole industry and standard-rating some minor interests will lead to VAT bunfights predicated on technical land law questions – which is never fun.
The suggestion to make all HMLR titles automatically taxable is perhaps the most unworkable proposal, for two reasons. First, it ignores the fact that VAT taxes supplies of beneficial title, not legal title; it is the latter that is registered at Land Registry. Second, it ignores the fact that there are not only swathes of unregistered land in the UK (such as in North West England), but also that not all types of interest in land are, or can be, registered and so the transaction may not qualify for registration.
However, there is one area where reform is needed, and that is in relation to the option anti-avoidance rules. These were originally engineered to address a particular problem (cashflow schemes for VAT-exempt occupiers) that is now better handled by the doctrine of abuse – as set out in Halifax plc v C&E Commrs (Case C-255/02) and University of Huddersfield Higher Education Corporation v C&E Commrs (Case C-223/03). Instead, the anti-avoidance rules have either trapped benign transactions, or actually facilitated avoidance. There are changes that can be made to those rules to at least protect benign transactions (see below).
Recommendation
Rather than wholesale reform to the rules, what is instead needed is greater clarity in guidance on HMRC’s interpretation of the current rules and consistency in the implementation of those rules. The rules are generally well-understood and they work. The only source of uncertainty seems to be HMRC itself.
The focus should be on four areas:
1. Recommitting to the established consensus of what constitutes a supply of land and what does not (otherwise the whole issue is cut off at source).
2. Clarifying existing policy (and where appropriate, heeding the comments of those in industry) and sticking to it.
3. Clarifying guidance and internal manuals; and
4. Making some simple clarificatory changes to the legislation.
One suggested simple legislative change would be to amend the anti-avoidance disapplication rules to allow a ‘development financier’ not only to occupy up to 10% of a building without disapplying an option to tax, but also to fund up to 10% of the cost of a capital item that would otherwise trigger the disapplication. This would take almost all benign transactions out of the scope of the anti-avoidance provisions at a stroke.
Another welcome change would be to allow housing associations’ VAT1614G certificates to be back-to-backed up a property subsale chain in the way that residential converters’ VAT1614D certificates can. Housing associations very often acquire development sites via intermediaries in an A to B to C subsale chain, where C is the housing association. While C can render B’s option to tax ineffective, B cannot do the same to A’s option to tax, creating sizeable blocked VAT for B without some heavy contractual lifting between the parties (if indeed this is possible).
Finally, there is some irony in that most of HMRC’s efforts in the property VAT space of late have been to argue that supplies are not supplies of land (for instance, see Landlinx Estates Ltd v HMRC [2020] UKFTT 220 (TC) where HMRC tried to argue that the release (for a consideration) of an option to purchase land was a taxable supply of services rather than an exempt supply of an interest in land for VAT purposes or in relation to rights of light for several years) – which would render the land exemption moot anyway.
Chris Nyland, Gowling WLG (adapted from LexisNexis®PSL Tax). For the call for evidence, which closes on 3 August,see bit.ly/3fZYbQw.
Home >Articles > The call for evidence on the VAT land exemption
The call for evidence on the VAT land exemption
Rather than wholesale reform of the rules, we need greater clarity and consistency from HMRC.
HMRC has launched a call for evidence seeking views on the current VAT rules relating to land and property and exploring potential options for simplifying them. This would appear to be driven by Brexit now that the UK is freer to extend or reduce the scope of the exemption from VAT.
What reforms are being considered?
This exercise seems willing to leave all options on the table, including:
making all land transactions exempt;
making all land transactions taxable at a reduced rate;
making all commercial land taxable, with an ‘option to exempt’;
automatic taxable status for some ‘minor’ classes of interest; and/or
more outlandishly, automatic taxable status for property registered at HM Land Registry (HMLR).
Is reform needed?
In my view, a wholesale refactoring of the VAT land exemption is unnecessary. Reform will create a parallel set of laws and necessitate transitional provisions which will add complexity.
Any move to a blanket exemption or reduced-rating will hit some sectors of real estate, and operators, disproportionately harder than others. As with the self-storage rule changes in 2012, the spectre of state aid questions could loom large.
Reversing the polarity of the option to tax into an ‘option to exempt’ will confuse the whole industry and standard-rating some minor interests will lead to VAT bunfights predicated on technical land law questions – which is never fun.
The suggestion to make all HMLR titles automatically taxable is perhaps the most unworkable proposal, for two reasons. First, it ignores the fact that VAT taxes supplies of beneficial title, not legal title; it is the latter that is registered at Land Registry. Second, it ignores the fact that there are not only swathes of unregistered land in the UK (such as in North West England), but also that not all types of interest in land are, or can be, registered and so the transaction may not qualify for registration.
However, there is one area where reform is needed, and that is in relation to the option anti-avoidance rules. These were originally engineered to address a particular problem (cashflow schemes for VAT-exempt occupiers) that is now better handled by the doctrine of abuse – as set out in Halifax plc v C&E Commrs (Case C-255/02) and University of Huddersfield Higher Education Corporation v C&E Commrs (Case C-223/03). Instead, the anti-avoidance rules have either trapped benign transactions, or actually facilitated avoidance. There are changes that can be made to those rules to at least protect benign transactions (see below).
Recommendation
Rather than wholesale reform to the rules, what is instead needed is greater clarity in guidance on HMRC’s interpretation of the current rules and consistency in the implementation of those rules. The rules are generally well-understood and they work. The only source of uncertainty seems to be HMRC itself.
The focus should be on four areas:
1. Recommitting to the established consensus of what constitutes a supply of land and what does not (otherwise the whole issue is cut off at source).
2. Clarifying existing policy (and where appropriate, heeding the comments of those in industry) and sticking to it.
3. Clarifying guidance and internal manuals; and
4. Making some simple clarificatory changes to the legislation.
One suggested simple legislative change would be to amend the anti-avoidance disapplication rules to allow a ‘development financier’ not only to occupy up to 10% of a building without disapplying an option to tax, but also to fund up to 10% of the cost of a capital item that would otherwise trigger the disapplication. This would take almost all benign transactions out of the scope of the anti-avoidance provisions at a stroke.
Another welcome change would be to allow housing associations’ VAT1614G certificates to be back-to-backed up a property subsale chain in the way that residential converters’ VAT1614D certificates can. Housing associations very often acquire development sites via intermediaries in an A to B to C subsale chain, where C is the housing association. While C can render B’s option to tax ineffective, B cannot do the same to A’s option to tax, creating sizeable blocked VAT for B without some heavy contractual lifting between the parties (if indeed this is possible).
Finally, there is some irony in that most of HMRC’s efforts in the property VAT space of late have been to argue that supplies are not supplies of land (for instance, see Landlinx Estates Ltd v HMRC [2020] UKFTT 220 (TC) where HMRC tried to argue that the release (for a consideration) of an option to purchase land was a taxable supply of services rather than an exempt supply of an interest in land for VAT purposes or in relation to rights of light for several years) – which would render the land exemption moot anyway.
Chris Nyland, Gowling WLG (adapted from LexisNexis®PSL Tax). For the call for evidence, which closes on 3 August,see bit.ly/3fZYbQw.
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