|HMRC Reference:Notice 742 (June 2012)||View Change History|
This notice cancels and replaces Notice 742 (March 2002). Details of the main changes to the previous version can be found in paragraph 1.2 of this notice.
This notice explains when transactions involving land and buildings are exempt from VAT. We recommend that you also read Notice 742A Opting to tax land and buildings. The land law in Scotland differs in many ways from that in England and Wales. Notice 742/3 Scottish land law terms may help you to understand these differences.
Updates 1, 2 and 3 to the previous version have been incorporated within the body of the text where appropriate, and the notice has been revised to reflect changes in HM Revenue & Customs' (HMRC) interpretation of the law. In particular, changes have been made to:
You should read this notice if you make, or intend to make, supplies of any interest in land, buildings or civil engineering works.
Section 31 of the VAT Act 1994 holds that goods and services specified in Schedule 9 to the Act are exempt supplies. Schedule 9, Group 1 specifies those supplies of land and buildings that are exempt from VAT and those that are excluded from the exemption.
The UK land exemption is based on the European legislation in Article 135 of Council Directive 2006/112. This requires Member States to exempt freehold and similar sales of land and buildings and 'leasing or letting of immovable property', subject to certain mandatory exclusions. It also gives Member States the discretion to introduce further exclusions to the 'leasing or letting' exemption.
For the purposes of VAT, the term ‘land’ includes any buildings, civil engineering works, walls, trees, plants and any other structure or natural object in, under or over it as long as they remain attached to it.
You make a supply of land by making a grant of an interest in, right over or licence to occupy land in return for a payment or consideration. If you make free supplies of land you should read paragraph 7.6. A grant includes an assignment or surrender.
An interest in land can be legal or beneficial:
An interest in land can be a…
which is the…
formal ownership of an interest in or right over land, such as a freehold or leasehold interest
right to receive the benefit of any supplies made of the land, such as sale proceeds or rental income. A beneficial interest can be held and transferred separately from the legal interest in the land.
Rights over land include …
rights of entry
allow an authorised person or authority to enter land. For example you might allow someone to come onto your land to perform a specific task.
grant the owner of neighbouring land a right to make their property better or more convenient, such as a right of way or right of light.
are a right of way to transport minerals extracted from land over another’s land, or to lay pipes or cables over or under another’s land.
profits à prendre
are rights to take produce from another’s land, such as to extract minerals.
UK law currently exempts the supply of rights over land. However, these are often supplied together with freehold or leasehold interests in land and form part of a single supply. For example, a lease may be granted of a single floor in an office block with an easement over the common areas, such as reception and lifts, to allow the lessee to access his floor. In such cases the supply of the right over land (in this case the easement) will share the same tax treatment as the principal supply.
Some profits à prendre, such as the right to fell and remove timber, are standard rated under the exceptions to exemption in UK law (see section 3 for further information). In addition, the right granted to harvest and remove crops may in some cases be treated as a zero rated supply of food or animal feed stuff - see VAT Notices 701/14 Food and 701/15 Animals and animal food.
A licence to occupy is a written or oral agreement which falls within the European concept of 'leasing or letting of immovable property' but falls short of being a formal lease for the purpose of UK land law.
For a licence to occupy to exist, the agreement has to have all characteristics of a 'leasing or letting of immovable property'. This is the case if the licensee is granted right of occupation of:
All of these characteristics must be present.
Where a licence to occupy is granted together with other goods and services as part of a single supply, the nature of the overarching supply will determine how it should be categorised for VAT purposes.
For examples of supplies that are licences to occupy land see paragraph 2.6. For examples of supplies that are not licences to occupy see paragraph 2.7.
The following are examples of licences to occupy land. This list is not exhaustive:
The following are examples of supplies that are not licences to occupy land:
The grant, assignment or surrender of an interest in, right over or licence to occupy land is normally exempt from VAT. There are exceptions to this general exemption:
Freehold sale or long lease in new dwellings, communal residential or relevant charitable buildings by the person constructing
see Notice 708 Buildings and construction.
Freehold sale of other types of new or partly completed buildings (e.g. shops)
see paragraph 3.2.
Freehold sale of new or partly completed civil engineering works
see paragraph 3.3.
Sale of land and buildings as part of a transfer of a going concern
not a supply for VAT purposes. See Notice 700/9 Transfer of business as a going concern.
see section 4.
Letting of facilities for sport and physical recreation
see section 5.
see section 6.
Hotel and holiday accommodation
see Notice 709/3 Hotels and holiday accommodation.
Pitches for caravans on seasonal sites
see Notice 701/20 Caravans and houseboats.
Pitches for tents or camping facilities
see Notice 701/20 Caravans and houseboats.
The right to fell and remove timber
if you sell land that contains standing timber your supply is of exempt land
Leasing and letting of moorings
moorings for houseboats may qualify for exemption, see Notice 701/20 Caravans and houseboats.
if the mooring charge is for a “qualifying ship” the supply may be zero-rated, see Notice 744C Ships, aircraft and associated services. A "qualifying ship" is a ship of a gross tonnage of not less than 15 tons which is neither designed nor adapted for use for recreation or pleasure.
see paragraph 3.4.
You can opt to tax land (including buildings). Once you have opted to tax any supplies you make of the opted land will normally be standard-rated. Please read Notice 742A Opting to tax land and buildings for more information.
If you sell the freehold of a new, or partly completed, commercial building your supply is standard-rated unless it qualifies to be treated as part of a transfer of a going concern (see Notice 700/9 Transfer of business as a going concern).
For the purposes of this paragraph a commercial building is any building that is not designed as a dwelling or number of dwellings nor intended for use solely for relevant residential or relevant charitable purposes. For the meaning of these terms, see Notice 708 Buildings and construction. Examples of commercial buildings are shops, factories, warehouses and offices.
A building is new for 3 years from the date that it is completed. The date of completion is the date the certificate of practical completion is issued, or the date the building is fully occupied, whichever happens first. All freehold sales that take place within the 3-year period are standard-rated. However, leasehold sales are exempt (subject to the option to tax - see notice 742A Opting to tax land and buildings).
If you sell the freehold of a new or, partly completed, civil engineering work your supply is standard-rated unless it qualifies to be treated as part of a transfer of a going concern (see Notice 700/9 Transfer of business as a going concern). Examples of civil engineering works are roads, bridges, airfields, oil refineries and pipes used for mains services. A civil engineering work is new for 3 years from the date it is completed. The date of completion is the date the certificate of completion is issued by an engineer, or the date it is first fully used - whichever happens first. All freehold sales that take place within the 3-year period are standard-rated.
If you sell the freehold of some bare land, but that land is ancillary to new or part completed civil engineering works, such as an airfield or oil refinery, you are making a single standard-rated supply.
If you sell the freehold of land containing new civil engineering works but those works are a minor part of the supply, you are making a supply of exempt land (unless you have opted to tax). An example of this is the sale of a development site on which you have built roads and laid pipes for drainage. It would also be the case where you sell individual building plots on which connections to mains services have been constructed. The services of constructing civil engineering works might be zero rated if in the course of construction of a new dwelling. See Notice 708 Buildings and construction.
If you grant viewing accommodation, such as boxes at a sports ground, theatre, concert hall or other place of entertainment, your supply is excluded from exemption and standard-rated. This includes any accommodation that is intended for use by individuals or groups for viewing a sporting event, show or other form of entertainment, regardless of whether the entertainment is actually in progress when the accommodation is used. If you let an entire theatre, concert hall or other place of entertainment your supply is normally exempt, unless you have opted to tax.
If you provide facilities for parking vehicles your supply will normally be standard-rated. There are exceptions to this general rule. This section will help you decide the liability of your supplies.
If you make a grant of the right to use facilities which are either designed for parking vehicles or provided specifically for that purpose your supply is standard-rated except in the circumstances described in paragraphs 4.4 and 4.5. The following are examples of standard-rated supplies of parking facilities:
If you grant an interest in, right over or licence to occupy land in the following circumstances, your supply will be exempt, unless you have opted to tax:
If you are making a zero rated sale or long lease of a building designed as a dwelling or number of dwellings (see Notice 708 Buildings and construction) and you supply a garage or other parking facility to the purchaser of the dwelling, you can zero rate the garage or other parking facility if:
Garages are also treated as part of a zero rated dwelling if constructed at the same time (or converted from a non-residential building at the same time) and intended to be occupied with the dwelling (see Notice 708 Buildings and construction).
However, zero rating can only apply to the extent that the consideration is in the form of a premium or first payment of rent for the sale or long lease of the dwelling and parking.
The first sale or long lease of a garage or other parking facility is zero rated if the garage or parking facility is within the 'site' of a building designed as a dwelling or number of dwellings and the grant is made by the same person that constructed the dwelling. This may happen, for example, if a developer sells a long lease of a flat to an individual who decides several months later to purchase a long lease in a parking space within the site of the block of flats from the same developer. In the case of a long lease, zero rating only applies to the extent that consideration is in the form of a premium or first rental payment for the parking space.
The VAT treatment of the letting of parking facilities to owners of dwellings will depend on the arrangements. However, the following general principles apply:
1. Where the freehold of a dwelling has been purchased and a licence or letting agreement for parking facilities is granted at a later date under a separate contract or agreement, supplies under the licence agreement are standard rated. This is because there are no periodic supplies of domestic accommodation with which to associate the supplies of parking facilities.
2. Where a leasehold of a dwelling has been purchased in return for a premium and the use of parking facilities are granted at a later date under a separate contract or agreement, the supplies of the parking facilities are normally standard rated. However, the supplies may be exempt where '3' below applies (see also paragraph 4.4.2 where the parking is subject to a separate major interest grant).
3. Where the dwelling has been purchased under an agreement which either:
in return for a periodic rent or licence fee payable to the same landlord, the supplies of the parking facilities are exempt as long as:
The above does not apply to the provision of parking in conjunction with holiday accommodation. This is normally standard rated - see Notice 708 Buildings and construction.
For guidance on shared ownership arrangements, see paragraph 4.4.4. below.
The letting of garages or parking spaces in conjunction with the letting of dwellings for permanent residential use (under shorthold tenancy agreements or similar) is exempt providing that:
In some cases the dwelling and parking facilities can be the subject of separate letting agreements entered into at separate times. This can occur, for example, where an existing tenant agrees to rent a garage. In such circumstances the supplies of the dwelling and parking facilities can still be treated as single exempt supplies of domestic accommodation as long as:
(i) there are periodic rental payments (supplies) being made in respect of the dwelling to which the parking supplies can be associated, and
(ii) the two conditions in the bullet points above are met.
The position above contrasts with that applicable where leases have been purchased in return for premiums and periodic rents are not payable.
The position above applies to shared ownership properties as long as the purchaser continues to pay rent for the remaining share in the property.
Where parking facilities are supplied in conjunction with holiday accommodation the supply is normally standard rated (see Notice 708 Building and construction for more information).
The same general principles set out in paragraphs 4.4.3 and 4.4.4 apply to commercial premises.
If you grant a lease in commercial premises under an agreement that includes the provision of parking facilities, this is treated as a single supply (the parking has the same VAT liability as the commercial premises) provided that
The same treatment applies where the agreement for the lease of the premises includes an obligation on the tenant to accept a later grant of parking facilities if or when they become available.
This means that if the rents from the commercial premises are exempt from VAT, the parking facilities will also be exempt.
In other circumstances the provision of parking facilities in conjunction with the letting of commercial property will normally be a separate standard rated supply.
Where the agreements allow the actual number of parking spaces to be varied from year to year this will not normally affect the position of the parking facilities as part of a single supply of the commercial premises.
If you supply a garage or parking facility at a seasonal or holiday caravan park your supply is always standard-rated.
If you supply a garage in conjunction with the sale of a new caravan your supply is standard-rated.
If you supply a garage or parking space in conjunction with the supply of a permanent residential caravan pitch your supply is exempt providing:
If you supply a mooring for a houseboat of a type described in Notice 701/20 Caravans and houseboats your supply is exempt. If you supply a mooring and garage or parking space to a houseboat owner your supply of the garage or parking space is also exempt providing it is reasonably close to the mooring.
If you let facilities for playing any sport or for taking part in any physical recreation your supply is normally standard-rated. But, if the let is for over 24 hours or is for a series of sessions your supply may be exempt. Please see paragraph 5.3 and 5.4 for more details. If you are a sports club or a non-profit making body you should read Notice 701/45 Sport.
Premises are sports facilities if they are designed or adapted for playing any sport or taking part in any physical recreation, such as swimming pools, football pitches, dance studios and skating rinks. Each court or pitch (or lane in the case of bowling alley, curling rink or swimming pool) is a separate sports facility. General purpose halls, such as village or church halls, which merely have floor markings are not themselves classed as sports facilities and the letting of such halls is exempt even when let for playing a sport. Similarly, school halls or similar (but not gymnasiums) are treated as exempt providing it is the bare hall that is provided. However, if equipment such as racquets and nets are provided along with the hall the supply is of standard rated sports facilities.
If you make a single let of sports or physical recreation facilities for a continuous period of over 24 hours to the same person your supply is exempt, unless you have opted to tax. However, the person to whom you let the facilities must have exclusive control of them throughout the letting period.
If you let out sports and physical recreation facilities for a series of sessions your supply is exempt (unless you have opted to tax) when you meet all the following conditions:
the series consists of 10 or more sessions.
each session is for the same sport or activity.
each session is in the same place. This condition is still met where a different pitch, court or lane is used (or a different number of pitches, courts or lanes),as long as these are at the same establishment)..
the interval between each session is at least 1 day but not more than 14 days (for an interval to be at least 1 day, 24 hours must elapse between the start of each session). The duration of the sessions may be varied. There is no exception for intervals greater than 14 days through the closure of the facility for any reason.
the series is to be paid for as a whole and there is written evidence to the fact. This must include evidence that payment is to be made in full whether or not the right to use the facility for any specific session is actually exercised. Provision for a refund given by the provider in the event of the unforeseen non-availability of their facility would not affect this condition.
the facilities are let out to a school, club, association or an organisation representing affiliated clubs or constituent associations, such as a local league.
the person to whom the facilities are let has exclusive use of them during the sessions.
A sporting right is the right to take game or fish from land. The supply of sporting rights is normally standard-rated.
If the sporting rights form part of the supply of some land, there are occasions when the liability of the sporting rights will follow the liability of that land. Please see paragraph 6.2 for more information.
If you sell sporting rights as part of the freehold sale of the land over which those rights may be exercised, your supply will be exempt unless you have opted to tax.
If you lease land together with sporting rights over that land, and the sporting rights represent no more than 10% of the value of the whole supply, your supply will be of exempt land unless you have opted to tax.
If the sporting rights represent more than 10% of the value of the whole supply, you are making a standard-rated supply of those rights in addition to the lease of the land. You must apportion your charge fairly and reasonably between the sporting rights and the land.
The term ‘shooting in hand’ is used where a landowner keeps control of a shoot, makes all the necessary arrangements to stock the land with game and decides who participates in a shoot.
If you accept contributions towards the cost of maintaining a shoot from other ‘guns’ you invite to a shoot, you are not making a supply in the course of any business when all the following conditions are met:
only friends and relatives shoot with you.
you do not publicly advertise the shooting.
your shooting accounts show an annual loss at least equal to the usual contribution made by a ‘gun’ over a year.
the loss is not borne by any business but by you personally.
In these circumstances you must not charge VAT to the ‘guns’ and you cannot recover as input tax any VAT that you incur in maintaining the shoot.
If you set up a syndicate for individuals to contribute towards sharing the expenses of shooting, the syndicate does not normally make a supply of sporting rights to its members.
However if the syndicate is regularly paid to provide shooting facilities to individuals who are not members, or it makes taxable supplies of other goods or services, then it is in business. The syndicate must, if registrable, account for VAT on all its supplies including those to its members.
If you are a landowner or a tenant, and you grant shooting rights for less than their normal value to a syndicate of whom you are a member, you must account for VAT on the full value of those rights. If you supply other goods or services, such as the services of a gamekeeper or beater, you should charge VAT in the normal way.
If you operate a still-water fishery, the charges you make are standard-rated even if you supply both fishing rights and fish.
(a) you allow a person to choose whether to take away fish caught or to throw them back into the water, and
(b) you make a separate charge solely for those fish taken away, and
(c) the fish taken away are of a species generally used for food in the UK (see Notice 701/14 Food),
then the separate charge is zero-rated as a supply of those fish.
If you let a lake that is empty of fish to a person who will stock it with fish, you are supplying the lake and not the right to take those fish. You are making an exempt supply of land, unless you have opted to tax.
For VAT purposes, a beneficial owner who directly receives the benefit of the proceeds from selling, leasing or letting land or buildings is treated as being the person selling, leasing or letting the land or buildings. This is the case even though that person is not the legal owner. An example of this is a bare trust where a trustee is the legal owner of the land, but the beneficial ownership belongs to another person. The beneficial owner is treated as the person making the grant.
If the beneficial owner is making taxable supplies above the registration threshold they will have to register for VAT. They will then need to account for the VAT due on the supply and can claim any input tax that arises, subject to the normal rules. The beneficial owner may also request voluntary registration where the value of taxable supplies is below the registration threshold. Notice 700/1 Should I be registered for VAT? gives more information on registering for VAT.
However, where the trustees receive the benefit of the proceeds they should register for VAT as a single person if the value of their taxable supplies is above the registration threshold.
Where more than one person owns land or buildings, or receives the benefit of the proceeds from the grant of an interest in land or buildings, we treat them as a single person making a single supply for VAT purposes.
If the joint owners are making taxable supplies above the registration threshold they will have to register for VAT as a partnership, subject to the normal rules, even if no legal partnership exists. The joint owners may also request voluntary registration where the value of taxable supplies is below the registration threshold. For more information on VAT registration please read Notice 700/1 Should I be registered for VAT?
If you are obliged to dispose of land or buildings under a compulsory purchase order you are making a supply for VAT purposes. Your supply will generally be exempt, unless you have opted to tax. Payments described as “disturbance” are treated as part of the consideration for the supply.
If at the time of supply you do not know how much you will receive, there will be a tax point each time you receive any payment for the purchase.
If you grant someone the right to purchase an interest in your land or building within a specified time you are making a supply of an interest in land. The person acquiring such a right is said to have a ‘call option’ as he can call on you to sell your interest in the land or building as originally agreed. The liability of your supply will be whatever the liability of the land or building would be if supplied at that time.
If you are granted the right to require someone to purchase your interest in the land or building within a specified time you will have a ‘put option’. The supply, made by the prospective purchaser, is not one of an interest in land and therefore falls outside the scope of the exemption for land supplies.
There are three common ways in which a landlord can recover rent from a third party. If you do receive payment from a third party you should still address any related VAT invoice to your tenant, as your supply is still to him and not the third party.
If a tenant sub-lets land or buildings to a third party and the tenant defaults on payment of rent to the landlord, the landlord can issue a notice under the Law of Distress Amendment Act and collect the rent arrears from the third party. In turn the third party can reduce his rent payable to the tenant by the amount he has paid to the landlord. If this happens the supply chain remains the same; there is a supply of the land or building from the landlord to the tenant and a supply of the land or building from the tenant to the third party. If the landlord has opted to tax, any tax invoice must be issued to the tenant.
A surety or guarantor is normally party to any agreement between the landlord and the tenant. In the event that the tenant is unable to meet his liability to make the agreed periodic rental payments to the landlord then the surety or guarantor will make the payment on the tenant’s behalf. However, there is no supply by the landlord to the surety or guarantor. The surety or guarantor will not be able to recover any tax paid.
Landlords have, under common law, had the historic right to recover unpaid rent from former tenants (and their guarantors and sureties) as well as from current tenants, their guarantors and sureties. This right was regulated more tightly following the 1995 Act but the principle is the same, i.e. the supply is to the defaulting tenant and not to the former tenant or the guarantors or sureties of either. However, the 1995 Act does permit a former tenant who settles the outstanding debt to apply for an intermediary lease.
If you transfer or dispose of land or buildings that form part of the assets of your business free of charge you will still be making a supply. Where you have previously been eligible for input tax recovery in respect of the land or building (whether on the purchase or on the construction services when the building was built or substantially reconstructed) then its free disposal or transfer may trigger an output tax charge.
The value of such charges is calculated by reference to the market value of the property at the time of the disposal or transfer.
You must account for output tax on such supplies if:
(a) you were charged tax on the purchase, construction or substantial reconstruction of the land or building,
(b) you were entitled to recover all or part of the input tax, and
(c) your supply is standard-rated. Your supply will be standard rated, for example, if you are disposing of the freehold of a new commercial building or if you have opted to tax (and the option is not disapplied). For further information, see section 3.
If you are making a free supply that is exempt rather than standard rated you may be required to make an adjustment of input tax under 'clawback' or the capital goods scheme if you were entitled to recover input tax in connection with the property. For further information, see Notice 706 Partial exemption and Notice 706/2 Capital goods scheme.
Where the recipient of a free supply is registered for VAT and is acquiring the land or building for a business purpose, you may be able to use the procedure described in Notice 700/35 Business Gifts to provide acceptable evidence to support a claim for input tax.
Where you intend to put a building to private or non-business use and the acquisition, construction, reconstruction or refurbishment costs have been incurred on or after 1 January 2011 you must only recover that proportion of the VAT that relates to your taxable business supplies. It is important that when considering the appropriate apportionment that you take into account all the intended future use over the economic life of the building (normally reckoned as ten years, in line with the Capital Goods Scheme (CGS)).
If the acquisition, construction, reconstruction or refurbishment costs incurred on or after 1 January 2011 are assets of the business and create a capital item, i.e. have a value of £250,000 or more, CGS adjustments will be carried out to reflect any changes in business and/or taxable use of the building - see Notice 706/2 Capital Goods Scheme.
If you are transferring land or buildings that are let to tenants or are in the process of being let, you should read Notice 700/9 Transfer of a business as a going concern.
If you are transferring land or buildings that are capital items for the purposes of the capital goods scheme, you should make the purchaser aware of any capital goods scheme adjustments you have made. You will need to provide the purchaser with sufficient information to enable them to carry out any future adjustments under the scheme that might be necessary. Please see Notice 706/2 Capital goods scheme for details.
If you cancel your VAT registration because you are closing down your business or trading below the registration limits, some or all of the assets on hand (including land and buildings) may be treated as supplied by you when you deregister. You will have to account for VAT on these assets if the following conditions are met:
If the land or buildings are capital items for the purposes of the capital goods scheme you may need to make a final adjustment under the scheme. Further information can be found in Notice 706/2 Capital goods scheme.
If you are a farmer operating under the Agricultural Flat Rate Scheme and can produce a certificate of evidence to that effect, then this paragraph does not apply to you.
If fixtures and fittings are included with a building or land they are not treated as separate supplies for VAT purposes. This means that their liability is the same as that of the land or building with which they are being supplied.
The value of a transaction for Stamp Duty Land Tax purposes includes any VAT that is chargeable.
Information about Stamp Duty Land Tax can be found online on the HMRC website.
Agreements drawn up between developers, local authorities and water sewerage undertakers make provision for a wide variety of land, buildings and works to be provided, at the developer’s expense, in connection with the granting of planning permission for the development.
If you, as a developer, dedicate or vest, for no monetary consideration:
(a) a new road (under the provisions of the Highways Act 1980 or the Roads (Scotland) Act 1984), or
(b) a new sewer or ancillary works (under the provisions of the Water Industries Act 1991 or the Sewerage (Scotland) Act 1968),
it is not a supply by you. No VAT is chargeable to the local authority or sewerage undertaker.
The input tax you incur on the construction of such works is attributable to your supplies of the development that is served by the road or sewer. For example, if your supplies of the land or buildings are taxable supplies, such as new houses, then the input tax you incur on constructing the roads and sewers is recoverable according to the normal rules. Where you make exempt supplies you will not be able to recover all your input tax.
As a developer of a private housing or industrial estate you may transfer, for a nominal monetary consideration or peppercorn, the basic amenities of estate roads, footpaths, communal parking and open space to a management company that will maintain them. This is not a supply, but the input tax you incurred on the building costs is attributable to the supplies of the land and buildings of the development itself.
The Community Infrastructure Levy (‘CIL’) is a levy that local authorities in England and Wales can choose to charge on developments in their area. The money obtained can be used to support development by funding infrastructure that the council, local communities and neighbourhoods want. It is a levy charged upon developers.
CIL is not consideration for any supplies by local authorities to developers and consequently it is outside the scope of VAT.
Developers can elect not to pay money to the local authority but instead to transfer an asset such as land to the authority. Again this is not consideration for any supplies by the local authority to the developer. However, the transfer of the asset can result in a supply of it by the developer to the local authority. See paragraph 7.6 for further information.
As a developer you may provide many other types of goods and services free, or for a purely nominal charge, to the local or other authority under section 106 of the Town and Country Planning Act 1990 or other similar agreements. These agreements are sometimes described as ‘planning gain agreements’.
Such goods and services may include buildings such as community centres or schools, amenity land or civil engineering works. Alternatively, they may be in the form of services such as an agreement to construct something on land already owned by the authority or a third party. Any such provision of goods or services is not a supply for a consideration to the local or other authority, or to the third party. Consequently, no VAT is chargeable by you on the handing over of the land or building or the completion of the works. However, the input tax you incur is attributable to your supplies of land and buildings on the development for which the planning permission was given.
When a development is undertaken there may need to be road improvements. These road improvements will normally be undertaken in one of the following ways:
The Highways Agency will arrange for the works to be carried out. Under section 278 of the Highways Act 1980, the Highways Agency may then recover from you, the developer, the costs incurred by the Highways Agency on certain road improvements. These costs will normally include irrecoverable VAT that has been charged to the Highways Agency by a contractor. As there is no supply between the Highways Agency and yourself, but merely a reimbursement by you of VAT inclusive costs, you are not entitled to recover the VAT element as your input tax.
If you, the developer, are permitted by the Highways Agency to carry out the works at your own cost, then there is no supply by you of the works to the Highways Agency. This is because you do not receive any consideration for the works from the Highways Agency. However you may recover the input tax as attributable to your own ultimate supply of land and buildings from the development. For example, if the development is a taxable supply you can recover all the input tax.
You may be required to pay sums of money, or sums of money in addition to buildings or works, to a local authority or a third party under section 106 of the Town and Country Planning Act 1990 and other similar agreements. You may, for example, pay money towards the future maintenance of a building or land, or as a contribution towards improvement of the infrastructure. Such sums are not consideration for taxable supplies to you by the local authority or by the third party.
If you mortgage your property, as security for borrowing money, you are not making a supply of that property.
Sales of repossessed property take place in two ways:
If a financial institution, or any other person, sells land or buildings belonging to you in satisfaction of a debt owed by you, you are making a supply. If tax is due on that supply, the person selling the land or buildings is responsible for accounting for that VAT (please see paragraph 9.4 for more information).
If a person obtains a Court Order and forecloses on land or buildings belonging to you, there is a supply by you to that person of the land or building. However, it is possible that the land or building could be treated as an asset of a business that is transferred as a going concern. Please see Notice 700/9 Transfer of a business as a going concern for details. The person foreclosing can opt to tax. If the land or building is subsequently sold the person foreclosing makes the supply.
A lender may repossess land or buildings, or appoint an LPA receiver without foreclosing, where the land and buildings are rented out to tenants. If the rental income received by the lender is used to reduce the debt you owe, or to make interest payments due in respect of that debt, a supply by you to the tenant takes place. If the supply is standard-rated the lender or LPA receiver should account for VAT on your behalf (please see paragraph 9.4 for more information).
There are a number of methods under which the lender or LPA receiver can account for VAT. If you require details of how to remit VAT on behalf of a borrower please see Notice 700/56 Insolvency.
There is no supply for VAT purposes by a prospective tenant if you pay that prospective tenant for doing no more than entering into a lease with you.
However, if you pay an inducement to a prospective tenant who, in return, provides a benefit to you other than that customarily derived from entering the lease, then there is a supply. The VAT liability of the supply will depend on the nature of the benefits provided, which could for example involve undertaking improvements or repairs to the building. Where the tenant acts as an anchor tenant (in order to attract other tenants) their supply will always be a standard rated supply. In such cases, the input tax you incur on the payment to the tenant is attributable to your lettings of the building and will generally be recoverable where you have opted to tax (see notice 742A).
An inducement paid by a tenant to a third party to accept the assignment of a lease is not consideration for the assignment or grant but is a standard-rated supply of services by the third party.
Rent is the periodic payment made by a tenant to a landlord and is normally the subject of a written agreement. Rent payments can be non-monetary, and can include costs incurred by the landlord under the agreement which are recharged to the tenant. This will include items such as service charges and rates where the landlord is the rateable person.
If you grant a rent-free period or a rental reduction to a tenant who agrees to do something in return, then you have both made and received a supply. Both supplies will be of equal value, but will not necessarily have the same VAT liability. If nothing is done or received in return for the rent-free period then, so far as that period is concerned, no supply has been made.
If you pay a tenant or licensee to surrender any interest in, right over or licence to occupy land that is a supply to you by the tenant. That supply is generally exempt, unless the tenant has opted to tax.
If you accept the surrender of a lease in return for payment from the tenant (sometimes referred to as a ‘reverse surrender’), your supply is exempt unless you have opted to tax.
Some variations to leases simply alter one or more of the terms, such as permitting the building to be used for a purpose that was originally prohibited. Other variations to a lease are more fundamental, such as an extension to the length of the tenancy or an alteration to the demised area. Where the latter occurs the old lease is treated as surrendered and a new lease granted in its place. Any consideration you receive for either type of variation is exempt, unless you have opted to tax. However, where there is no monetary consideration, no supply is seen as taking place if the variation merely extends the term and/or extends right of occupation to a larger part of the same building. Further details are given in a Statement of Practice that has been agreed between HMRC and the Law Society. This is published in HMRC’s guidance, V1-8 Land & Property.
Restrictive covenants are placed on land to control its use. A typical restrictive covenant is one that forbids any development of the land.
If you agree to give up a restrictive covenant in return for payment your supply will be exempt, unless you have opted to tax the land the restrictive covenant applied to or the supply of the land is itself excluded from exemption (see paragraph 3.1).
Any statutory compensation you pay to a tenant under the terms of the Landlord and Tenant Act 1954 or the Agricultural Tenancies Act 1995 is outside the scope of VAT. This applies even if an agricultural tenant has issued a “notice to quit” having decided to retire from farming. Examples of items for which statutory compensation is given on the tenant quitting property are milk quotas left behind, manurial values and standing crops.
Where you and the tenant agree that the tenant will leave in return for additional payment, the payment you make will be consideration for the tenant surrendering the lease and will generally be exempt, unless the tenant has opted to tax.
Generally any payment that you, as a prospective tenant, have to make in order to obtain the grant of a lease or licence is part consideration for that grant. This is the case even if the payment is described as a reimbursement or indemnification of the landlord’s costs. Whether the payment attracts VAT depends on whether the landlord has opted to tax.
Many leases provide that an existing tenant shall make good any legal or other advisory costs incurred by the landlord as a result of the tenant exercising rights already granted under the lease. For example the tenant may be entitled to assign the lease, to sublet or to make alterations to the building provided that the tenant first obtains the landlord’s consent. As a result the landlord may incur legal or surveyors fees. In these circumstances the reimbursement payments by the tenant to the landlord are consideration for the principal supply of the lease.
If you have to make a payment to your landlord to obtain some additional right, it is consideration for the variation of the lease and is exempt unless the landlord has opted to tax.
When a tenanted building is sold or a lease is assigned mid-way through a rent period, an adjustment is normally made to the consideration at the point of completion. These rent adjustments are not consideration for any supply and are outside the scope of VAT.
For VAT purposes the consideration for the sale of the building or the assignment of the lease is the full value of the supply before any rent adjustment is made.
Rent adjustments may be made as follows:
the amount paid for the purchase is …
a landlord selling a building has received rent from tenants in occupation that relates to the period when the incoming landlord will be in ownership,
reduced to reflect the rent paid in advance.
a building is sold and the incoming landlord will receive rent from tenants in occupation which relates to the period when the outgoing landlord was in ownership,
increased to reflect that rent.
an outgoing tenant assigning a lease has paid rent which relates to the period of occupation by the incoming tenant,
increased to reflect the rent paid in advance.
a lease is assigned and the incoming tenant pays rent which relates to the period of occupation by the outgoing tenant,
is reduced to reflect that rent.
Where arrears of rent become due following a rent review output tax should normally be accounted for on the payment where an option to tax has been made, even if the arrears relate to period before the option to tax took effect. See Notice 742A Opting to tax land and buildings.
The treatment for VAT purposes of a landlord's contribution to costs incurred by a tenant will depend on the contractual position and the reason for the contribution. The general rule is that payment becomes consideration for a supply for VAT purposes when there is a direct link between what is paid and goods or services supplied in return for it. By contrast a payment freely given, with nothing supplied in return, is not consideration for a supply.
Where, for example, a landlord contributes toward the cost borne by a tenant of fitting out the demised premises, it is necessary to determine who is responsible for that work. If, as is quite often the case, it is the tenant then the contribution by the landlord is unlikely to be consideration for a supply by the tenant, unless there is some other benefit received in return for it. For these purposes, the fact that the landlord may be able to claim Plant and Machinery Allowance in relation to the contribution paid is not of itself such a benefit received in return for that payment. By contrast, if the fitting out is the landlord's responsibility then the contribution paid to the tenant is likely to be consideration for a supply by the tenant to the landlord.
The terms of a lease may provide for the landlord to recover from tenants, at or near the termination of the lease, an amount to cover the cost of restoring the property to its original condition. The amount is often agreed between the parties and may be based on a surveyor or contractor’s estimate.
A dilapidation payment represents a claim for damages by the landlord against the tenant’s ‘want of repair’. The payment involved is not the consideration for a supply for VAT purposes and is outside the scope of VAT.
If, as a landlord, you carry out refurbishment works following receipt of a dilapidation payment, the input tax you incur in carrying out those works should be treated as follows:
It is common for leases between landlords and tenants to lay down that the landlord shall provide, and the tenants shall pay for, the upkeep of the building as a whole. The lease may provide for an inclusive rental, or it may require the tenants to contribute by means of a charge additional to the basic rent. These charges are generally referred to as service charges, maintenance charges or additional rent. The services provided may include:
If, as a landlord or licensor, you are obliged under the terms of the lease to provide services similar to those above, the service charges follow the same VAT liability as the premium or rents payable under the lease or licence (normally exempt, unless you have opted to tax).
If you provide services to someone who owns the freehold of a building and there are no continuing supplies of accommodation to which the service charge can be linked, your charge is always standard-rated.
If you provide services to the occupants of holiday accommodation your supply is standard-rated. Please see Notice 709/3 Hotels and holiday accommodation for more information.
If you are responsible for providing services to the occupants of a building in which you have no interest, your services will always be standard-rated (subject to the VAT registration threshold) as they are not part of the supply of the accommodation itself.
If your contract is to arrange for the services and to collect the service charge on the landlord’s behalf as a managing agent, then your supply is to the landlord and not to the occupants. Your supply is still standard-rated.
If you collect payments from the other occupants for their share of the rent, rates and other costs, and you pass the full amount of these to the landlord, you should treat the sums collected from the other occupants as disbursements. Please see Notice 700 The VAT Guide for more information on disbursements.
As a landlord you may make charges to your tenants for items other than general services. These charges tend to fall into three categories:
The rest of this paragraph outlines the VAT treatment of some of the most common charges.
If you (the landlord) are the policyholder or rateable person, any payment for insurance or rates made by the tenants is further payment for the main supply of accommodation. If the tenant is the policyholder or rateable person, and you make payments on the tenant’s behalf, you should treat those payments as disbursements.
If the phone account is in your name, any charge you make to tenants is payment for a standard-rated supply by you. This includes the cost of calls, installation and rental. If the account is in the name of the tenant, but you pay the bill, the recovery of this from the tenant is a disbursement.
If you make a charge under the terms of the lease to tenants for the use of facilities that form a common part of the premises, such as reception and switchboard services, any payment you receive will be further consideration for the main supply of accommodation.
If you make a separate charge for office services, such as typing and photocopying, this is a separate standard-rated supply. However, if under the terms of the lease, there is one inclusive charge for office services and accommodation together, and the tenants are expected to pay for the services regardless of whether they actually use them, the liability of the services will follow that of the main supply of office accommodation.
Fixtures and fittings are regarded as part of the overall supply of the accommodation and any charges for them are normally included in the rent. However if you provide fixtures and fittings under a separate agreement your supply will normally be standard-rated.
If you make a separate charge for un-metered supplies of gas and electricity used by tenants, it should be treated as further payment for the main supply of accommodation. However, where you operate a secondary meter, the charges to the tenants for the gas and electricity they use are consideration for separate supplies of fuel and power. These supplies will be standard-rated unless the fuel supplied is of a de-minimis quantity, in which case the supply will be subject to the reduced rate. See Notice 701/19 Fuel and Power for more information.
The charge raised by you to the occupants for managing the development as a whole, and administering the collection of service charges and so on, is further payment for the main supply of accommodation.
If the charges for the use of recreational facilities are compulsory, irrespective of whether the tenant uses the facilities, then the liability will follow the main supply of accommodation.
If you are the owner or tenant of the premises and you do not grant other occupants an exempt licence to occupy land (see paragraphs 2.5 and 2.6), then any service charge you make is standard-rated. This applies even if you are simply passing on an appropriate share of your costs. The only exception is if you are paying and recharging a bill that is entirely the liability of another occupant, such as a phone bill or insurance premium in the other occupant’s name. You can treat such payments as disbursements. You can find more information on disbursements in Notice 700 The VAT Guide.
Service charges relating to the upkeep of common areas of an estate of dwellings, or the common areas of a multi-occupied dwelling, are exempt from VAT so long as:
This is because the service charge is treated as ancillary to the main supply of exempt domestic accommodation.
If you provide services to freehold owners of dwellings your supply is taxable because there is no supply of domestic accommodation to link those services to. However this is unfair to freehold owners, especially those living on the same estate as leaseholders. To address this inequity an extra-statutory concession allows all mandatory service charges paid by occupants of dwellings toward the:
(a) upkeep of the common areas of a housing estate, such as paths, driveways and communal gardens; or
(b) upkeep of the common areas of a block of flats, such as lift maintenance, corridors, stairwells and general lounges; and
(c) general maintenance of the exterior of the block of flats or individual dwellings, such as painting, and
(d) provision of an estate warden, house manager or caretaker,
to be treated as exempt from VAT.
Where you apply the concession and treat the service charges as exempt your right to recover the associated input tax may be restricted. This may also have an impact on your eligibility to remain registered for VAT.
If the landlord makes a separate charge for un-metered supplies of gas and electricity used by occupants, it should be treated as further payment for the main supply of exempt domestic accommodation. However, if the landlord operates a secondary credit meter, the charges to the occupants for the gas and electricity they use are separate supplies of fuel and power subject to VAT at the reduced rate.
Optional services supplied personally to occupants, such as shopping, carpet cleaning or painting a private flat, are standard-rated.
The charge made by the landlord to the occupants for managing the estate and collecting the service charges is further payment for the main supply of exempt domestic accommodation.
A managing agent acting on behalf of a landlord can treat the mandatory service charges to occupants as exempt, providing the agent invoices and collects the service charges directly from the occupants.
However, any management fee collected from the occupants is standard-rated because it relates to the managing agent’s supply to the landlord.
Occupants of an estate may form a tenant-controlled management company. Sometimes that company will purchase the freehold of the estate and engage a service provider to maintain the common areas and provide any necessary warden or housekeepers. Providing the tenant-controlled management company is bound by the terms of the lease to maintain the common areas of the estate (or provide a warden), and the occupants are invoiced by and pay the service charges directly to the service provider the service charges may still be treated as exempt.
However, any management fee collected from the occupants is standard-rated (subject to the VAT registration threshold) because it relates to the service provider’s supply to the tenant-controlled management company.
Until the Commonhold and Leasehold Reform Act 2002 English law recognised only two forms of property ownership. These are:
The new form of property ownership introduced in 2002 is:
In addition to introducing a new alternative to leasehold as a means of property ownership the Act of 2002 also reformed residential leasehold law.
Commonhold will be available for residential, commercial or mixed use developments. Those who own the interests in individual units under commonhold are referred to as 'unit-holders'.
The reforms are intended to give unit-holders the security of freehold ownership by addressing some of the drawbacks of leasehold (such as the diminishing value of leases). They also seek to overcome the difficulties in enforcing positive obligations, such as such as an obligation to keep property in good repair, in freehold land.
A commonhold may only be registered upon the agreement of all those with a prescribed interest in the property.
The developer of a property, or a landlord, may enter into an agreement with existing occupants or future (identified) unit-holders to set up a commonhold. This is most likely to happen where a leasehold development is being converted to a commonhold.
Alternatively, property may be registered as a commonhold in advance of the future unit-holders being identified. The developer will then sell the units in the same way as any other freehold property.
The unit-holders acquire a freehold interest in a specific unit. It is the commonhold association, a type of management company, that owns the freehold of the common parts. The members of the commonhold association will be unit-holders. However, where a unit is jointly owned, only one of the joint owners will become a member.
The commonhold association is responsible for the upkeep of the common parts and will provide an estimate of annual expenditure, the commonhold assessment.
A commonhold unit is a freehold in a property that follows the normal VAT accounting rules. These rules are set out in Section 3.
The developer of a qualifying building (that is a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential or a relevant charitable purpose) may zero-rate the first supply of a commonhold unit in the property if the normal conditions for zero-rating are met (see Notice 708, Buildings and Construction).
If the conditions are met the zero-rating will apply in both of the following circumstances:
Any subsequent supplies of the units are exempt.
These will be exempt from VAT unless the supply is either:
in which case it will be standard-rated.
In setting up a commonhold there are 3 basic forms of transaction. These are set out below together with their VAT treatment.
With regard to the first supply of each unit where this involves:
and where it involves
For both residential and commercial property, the freehold interest in the common parts is vested in the commonhold association. Normally there will be no consideration attributed to the disposal but it is a supply for VAT purposes and there will be a requirement to charge VAT if the conditions of paragraph 7.6 apply.
This may occur when the proprietors of existing freehold properties apply for commonhold status because they have communal facilities such as shared roadways, paths or services etc. This could entail some or all of the existing freeholders giving up title to areas of their land (constituting what are to become the common parts). Any payment made to a former freeholder is likely to be seen as consideration for the surrender of the freehold interest. The liability being as follows:
Leasehold conversions will generally occur in developments that already have existing leaseholders in place prior to the establishment of the commonhold. Following agreement between the interested parties and the land being registered as commonhold all pre-existing leases are extinguished.
Where the former leaseholder gains ownership of a commonhold unit in the same property that was demised under the lease, the only supply is that of the freehold. The lease ceases to have legal effect and there is no supply of it for VAT purposes.
However when the lease is extinguished and the freehold is transferred to some other person, or the freehold units have different boundaries from the previous leasehold premises, for VAT purposes there is a supply of a surrender of an interest in the property by the former leaseholder.
The surrender of a lease in:
Where the leaseholder pays a consideration for the freehold interest in the unit he acquires, the liability for
The individual disposal of a unit follows the normal rules on VAT and therefore if:
A commonhold may be terminated as a result of a voluntary winding-up or by court order.
Charges can be levied by the commonhold association to pay for the upkeep of common parts. These charges are referred to as commonhold assessments and reserve fund levies and are treated in the same way as service charges to a long leaseholder or a non-commonhold freeholder.
Alternatively, the commonhold association may engage a service provider to maintain the common parts of an estate. In this case its position is akin to that of a tenant-controlled management company as explained in paragraph 12.5. As the commonhold association is obliged under the commonhold community statement to maintain the common parts, then providing the unit-holders are invoiced by and pay the service charges directly to the service provider, the charges raised under the commonhold assessment may still be treated as exempt.
However, any management fee collected from the occupants is standard-rated because it relates to the service provider's supply to the commonhold association.
This part of the legislation is generally directed at residential leaseholders in a multi-occupancy building. It amends the Leasehold Reform Housing and Urban Development Act 1993 which permitted leaseholders to acquire the freehold interest in a property through collective enfranchisement and to extend the length of their individual leases. Amendments are also made to other legislation including the Landlord and Tenant Act 1985, which introduced rights for tenants in relation to the payment of service charges.
These include various provisions concerning the rights to collective enfranchisement. The freehold title of the property is vested in a nominee that must be a qualifying Right to Enfranchisement Company (RTE). The reforms also confer a new right upon leaseholders, who do not wish to buy the freehold of a property, that enables them to form a 'Right to Manage' (RTM) company that will take over these duties from the landlord or the service provider. There are provisions for up to 25% of a block to be occupied for non-residential purposes although these occupants will not be qualifying tenants for the purpose of collective enfranchisement or the Right to Manage.
The rules for service charges for dwellings are as per Section 12 of Notice 742 and services provided by the RTM Company may be treated as exempt if, within the terms of the agreement leaseholders are invoiced by and pay the service charges directly to the RTM Company. Section 11 covers the liability of leasehold service charges raised to tenants who are in occupation for commercial purposes.
An RTE company may recover VAT if part of the premises to which it has freehold title has commercial tenants. It must opt to tax the property and account for VAT on all rents to commercial tenants. The VAT on costs will be recoverable to the extent that they relate to the commercial rents. More information is available in Notice 742A Opting to tax land and buildings.
Your Charter explains what you can expect from us and what we expect from you. For more information go to Your Charter.
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HM Revenue & Customs
VAT Liability Team
100 Parliament Street
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We may get information about you from others, or we may give information to them. If we do, it will only be as the law permits to:
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