Land and property

Foreword

This notice cancels and replaces Notices 742 (December 1995), 742/2 Sporting rights (June 1992), 742/1 Letting of facilities for sport and physical recreation (March 1990) and 701/24 Parking (September 1992). Details of any changes to the previous version can be found in paragraph 1.1 of this notice.

Further help and advice

If you need general advice or more copies of Customs and Excise notices, please ring the National Advice Service on 0845 010 9000. You can call between 8.00 am and 8.00 pm, Monday to Friday.

If you have hearing difficulties, please ring the Textphone service on 0845 000 0200.

If you would like to speak to someone in Welsh, please ring 0845 010 0300, between 8.00 am and 6.00 pm, Monday to Friday.

All calls are charged at the local rate within the UK. Charges may differ for mobile phones.

Other notices on this or related subjects

742A Opting to tax land and buildings

742/3 Scottish land law terms

709/3 Hotels and holiday accommodation

708 Buildings and construction

701/20 Caravans and houseboats

1. Introduction

1.1 What is this notice about?

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.

This notice has been restructured to improve readability. It contains text on parking, sporting rights and letting of facilities for sport and physical recreation, which did not appear in the previous edition.

This notice and others mentioned are available both on paper and on our Internet website at www.hmce.gov.uk.

1.2 Who should read this notice?

You should read this notice if you make, or intend to make, supplies of any interest in land, buildings or civil engineering works.

1.3 What area of law covers this notice?

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.

2. Supplies of land

2.1 What constitutes land?

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.

2.2 How do I make a supply of land?

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:

• a grant is the sale of a freehold or other interest, or a lease or a letting of land.
• an assignment is the transfer of a lease by the existing tenant to a new tenant.
• a surrender is giving up an interest in land to the person who granted it to you. More information on surrenders can be found in paragraphs 10.3 and 10.4.

2.3 What is an interest in land?

An interest in land can be legal or beneficial:

2.4 What are rights over land?

2.5 What is a licence to occupy land?

A licence is an authority to do something that would otherwise be a trespass. A licence to occupy land is created when the following criteria are met:

(a) the licence is granted in return for a consideration paid for by the licensee;

(b) the licence to occupy must be for a specified piece of land, even if the licence allows the licensor to change the exact area occupied, such as to move the licensee from the third to fourth floor;

(c) the licence is for the occupation of the land by the licensee;

(d) another person’s right to enter the specified land does not impinge upon the occupational rights of the licensee; and either;

(e) the licence allows the licensee to physically enjoy the land for the purposes of the grant, such as to hold a party in a hall; or

(f) the licence allows the licensee to economically exploit the land for the purpose of its business, such as to run a nightclub.

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.

2.6 Examples of supplies that are licences to occupy land

The following are examples of licences to occupy land. This list is not exhaustive:

• the provision of office accommodation, such as a specified bay, room or floor, together with the right to use shared areas such as reception, lifts, restaurant, rest rooms, leisure facilities and so on;
• the provision of a specified area of office space to which the licensor or other people have right of access. For example, people occupying an adjacent area of space may be able to walk through the area or share storage space;
• the provision of a serviced office that includes use of telephones, computer system, fax machine, photocopiers and so on;
• granting a concession to operate a shop within a shop, where the concessionaire is granted an area from which to sell their goods or services;
• granting space to erect advertising hoardings or display stands on specific sites, such as display cabinets in hotel foyers;
• granting space to place a fixed kiosk on a specified site, such as a newspaper kiosk or flower stand at a railway station;
• hiring out a hall or other accommodation for meetings or parties and so on. The use of a kitchen area, lighting and furniture can be included;
• granting a catering concession, where the caterer is granted a licence to occupy a specific kitchen and restaurant area, even if the grant includes use of kitchen or catering equipment;
• granting traders a pitch in a market or at a car boot sale; or
• granting somebody the right to place a vending machine on your premises.

2.7 Examples of supplies that are not licences to occupy land

The following are examples of supplies that are not licences to occupy land:

• sharing business premises where more than one business has use of the same parts of the premises without having their own specified areas;
• providing another person with access to office premises to make use of facilities, such as remote sales staff away from home having access to photocopiers and the like at another office;
• allowing the public to tip rubbish on your land;
• storing someone’s goods in a warehouse without allocating any specific area for them;
• granting of an ambulatory concession, such as an ice cream van on the sea front or a hamburger van at a football match;
• allowing the public admission to premises or events, such as theatres, historic houses, swimming pools and spectator sports events. This includes admission to a series of events, such as a season ticket; or
• any grant of land clearly incidental to the use of the facilities on it, such as hiring out safes to store valuables or the right to use facilities in a hairdressing salon. However, you could still be granting an exempt licence to occupy land if the facilities you supply are clearly incidental to the main supply of the land, such as office accommodation with normal office facilities.

3. The liability of a supply of land

3.1 How do I establish the VAT liability of a supply of land?

The grant, assignment or surrender of an interest in, right over or licence to occupy land is normally exempt from VAT. There are exclusions from this general exemption:

You can opt to tax your interest in land. Once you have opted to tax all the supplies you make in relation to your interest in the land will normally be standard-rated. Please read Notice 742A Opting to tax land and buildings for more information.

3.2 Freehold sales of new or part completed “non-qualifying” buildings

If you sell the freehold of a new, or partly completed, non-qualifying building your supply is standard-rated. Non-qualifying buildings are commonly commercial buildings and include offices, warehouses, retail premises and factories. 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.

3.3 Freehold sales of new or part completed civil engineering works

If you sell the freehold of a new or, partly completed, civil engineering work your supply is standard-rated. 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) and standard-rated civil engineering works. An example of this is building land on which you have built a road or laid pipes for connection to mains services. You must apportion your charge fairly and reasonably between the land and the civil engineering works.

3.4 Viewing accommodation

If you grant viewing accommodation, such as boxes at a sports ground, theatre, concert hall or other place of entertainment, your supply is 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.

4. Parking

4.1 The basic VAT position

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.

4.2 When do I make a standard-rated supply of parking facilities?

If you make a specific grant and the facilities are designed for, or provided specifically for parking vehicles your supply is standard-rated. The following are examples of standard-rated supplies of parking facilities:

• a letting or licence of a garage or designated parking bay or space. The letting of a garage is standard-rated even if it is not used for storing a vehicle;
• a right to park vehicles (including trailers) in, for example, a car park or commercial garage;
• a letting or licence of land specifically for the construction of a garage, or for use solely for parking a vehicle;
• a letting or licence of a purpose built car park. For example, a car park let to a car park operator;
• a letting of a taxi rank;
• the provision of storage for bicycles;
• the provision of storage for touring caravans; or
• a freehold sale of a ‘new’ or partly completed garage, car park or car parking facility other than in conjunction with the sales of new dwellings. (A garage or car park is ‘new’ for 3 years following the date on which it was completed).

4.3 When will a supply be of land rather than 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:

• letting of land or buildings (but not lock-up or other garages) where the conveyance or contract makes no specific reference to use for parking vehicles;
• letting of land or buildings where any reference to parking a vehicle is incidental to the main use;
• letting of land or buildings to a motor dealer for storing stock-in trade;
• letting of land or buildings to a vehicle transportation firm, to a vehicle distributor or to a vehicle auctioneer for use in the course of their business;
• letting of land, including land used at other times as a car park, for purposes such as holding a market or a car boot sale (this also includes the charge to the car owners selling their goods at a car boot sale);
• letting of land for the exhibition of vehicles;
• letting of land to a travelling fair or circus (and the incidental parking of vehicles); or
• the freehold sale of garages, car parks or car parking facilities that are not new (more than 3 years from the date on which they were completed).

4.4 Grants of parking facilities with dwellings

The sale or long lease of a new dwelling together with a garage or parking space by the person constructing that dwelling is zero-rated. However, if the new dwelling is holiday accommodation the supply is standard-rated, see Notice 708 Buildings and construction for more information.

The letting of garages or parking spaces in conjunction with the letting of dwellings for permanent residential use is exempt providing:

(a) the garage or parking space is reasonably near to the dwelling; and

(b) the tenant takes up both the lease of a dwelling and the lease of a garage from the same landlord.

In these circumstances the garage forms part of the domestic accommodation.

Where a garage is let separately from the letting of a dwelling it cannot be exempt from VAT and will be standard-rated. This is because there is no letting of domestic accommodation with which to associate the garage. This scenario commonly occurs when a local authority tenant renting a dwelling and garage then decides to purchase the dwelling. The local authority retains the garage and continues to lease it to their former tenant. As the local authority is only supplying a garage, and not domestic accommodation, the supply is standard-rated.

4.5 Grants of parking facilities with commercial premises

The supply of commercial premises together with parking facilities is treated as a single supply of the commercial premises, providing:

(a) the facilities are within or on the premises, or reasonably near to it; or

(b) the facilities are within a complex (for example, an industrial park made up of separate units with a ‘communal’ car park for the use of the tenants of the units and their visitors); and

(c) both lettings are to the same tenant by the same landlord.

If the rents from the commercial premises are exempt from VAT, the parking facilities will also be exempt. In any other circumstances the provision of parking facilities in conjunction with commercial property is a separate standard-rated supply.

4.6 Grants of garages and parking spaces at caravan parks

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:

(a) you retain ownership of the land on which the garage or parking space is sited; and

(b) the garage or parking space is reasonably close to the caravan pitch.

4.7 Moorings and parking facilities for houseboats

If you supply a mooring for a houseboat of a type described in Notice 701/20 Caravans and houseboats your supply is exempt. The supply of a garage or parking space to a houseboat owner is also exempt providing:

(a) the garage or parking space is supplied by the person who is supplying the mooring; and

(b) the garage or parking space is reasonably close to the mooring.

5. Sports facilities and physical recreation

5.1 The basic VAT position

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.

5.2 What is a sports facility?

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.

5.3 Lets for over 24 hours

If you make a single let of sports and 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.

5.4 Lets for a series of sessions

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:

6. Sporting rights

6.1 What are ‘sporting rights’?

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.

6.2 Sporting rights forming part of a supply of land

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.

6.3 Supplies relating specifically to shooting

6.3.1 Shooting in hand

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:

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.

6.3.2 Shooting syndicates

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 registerable, account for VAT on all its supplies including those to its members.

6.3.3 Landowners as syndicate 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 open market 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.

6.4 Supplies relating specifically to fishing

6.4.1 Still-water fisheries

If you operate a still-water fishery, the charges you make are standard-rated even if you supply both fishing rights and fish.

However, if:

(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.

6.4.2 Lakes

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.

7. Other land transactions

7.1 Beneficial owners of land or buildings

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. We treat the beneficial owner 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.

Where the benefit accrues directly to trustees, it is the trustees who should register for VAT as a single person if the value of their taxable supplies is above the registration threshold.

7.2 Joint owners of land or buildings

Where more than one person owns land or buildings, or receives the benefit of the consideration for 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?

7.3 Compulsory purchases

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.

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.

7.4 Options to purchase or sell an interest in land or a building

If you grant someone the right to purchase an interest in your land or building within a specified time for a stated price 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 for a stated price you will have a ‘put option’. It is the prospective purchaser that is making the supply, which will generally be standard-rated.

7.5 Recovery of rent from a third party

There are two 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 the tenant to whom you have leased or let the premises. Your supply is still to the tenant, not the third party.

7.5.1 Law of Distress Amendment Act 1908

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.

7.5.2 Sureties and Guarantors

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.

7.6 What if I make free supplies of land and buildings?

If you transfer or dispose of land or buildings that form part of the assets of your business free of charge you may still be making a supply. You may also make a supply if you use the land or building, or make it available for anyone else to use, free of charge or for a private or non-business purpose. You must account for output tax on such supplies if:

(a) you were charged tax on the purchase, construction, reconstruction or refurbishment of the land or building;

(b) you have treated all that tax as input tax and did not apportion between business and non-business use;

(c) you were eligible to treat all or part of the input tax as deductible; and

(d) your supply is standard-rated either in its own right or because you have opted to tax.

If you transfer or dispose of such land or buildings, the value of the supply is the market value at the time of its disposal. If you retain the land or building but make it available free of charge, the value of the supply is the cost to you of making it available. Where the recipient 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.

7.7 What if I transfer my business as a going concern?

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 must 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.

7.8 What if I have land and buildings on hand when I cancel my registration?

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 you previously claimed the input tax, unless the value is under £1000. Please see Notice 700/11 Cancelling your registration for more information.

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.

7.9 What if the land or building includes fixtures?

If the fixtures 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.

7.10 Stamp duty

The Stamp Office administers stamp duty. Any enquiry you have on liability to pay stamp duty, or on calculation of the amount payable, should be made to the Stamp Office.

8. Developers Agreements

8.1 Dedicating or vesting new roads or sewers

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.

8.2 Transfers of common areas of estates to management companies

As a developer of a private housing or industrial estate you may transfer, for a nominal monetary consideration, 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.

8.3 Planning gain agreements

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.

8.4 Agreements with the Highways Agency

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:

8.4.1 Works carried out by the Highways Agency

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.

8.4.2 Works carried out by the developer.

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.

8.5 What if I am required to make a cash contribution?

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.

9. Mortgages

9.1 The basic position

If you mortgage your property, as security for borrowing money, you are not making a supply of that property.

9.2 What if my land or buildings are repossessed and then sold?

Sales of repossessed property take place in two ways:

9.2.1 Under a power of sale

If a financial institution, or any other person, sells land or buildings belonging to you in satisfaction of a debt owed by you, a supply by you takes place. 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).

9.2.2 Foreclosures

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.

9.3 What if my land or buildings are repossessed and then rented out?

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).

9.4 How does the lender or LPA receiver account for the VAT?

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.

10. Supplies between landlords and tenants

10.1 What if I pay an inducement to a prospective tenant?

If you pay an inducement to a prospective tenant for them to enter into a lease, the prospective tenant is making a standard-rated supply of services to you. The input tax you incur on the payment to the tenant is attributable to the leasing of the land or building and will generally only be recoverable if you have opted to tax.

An inducement paid by a tenant to a third party to accept the assignment of a lease, or the grant of a sub-lease, is not consideration for the assignment or grant but is a standard-rated supplies of services by the third party.

10.2 Rent-free periods

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.

10.3 What if I pay my tenant to surrender a lease?

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.

10.4 What if I accept the surrender of a lease from my tenant?

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.

10.5 Variations to leases

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. The effect of this type of variation is that 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 consideration, no supply is seen as taking place.

10.6 Restrictive covenants

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 have opted to tax the land the restrictive covenant applied to.

10.7 Statutory payments

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 payments to do so, the payment you make will be consideration for the tenant surrendering the lease and will generally be exempt, unless you have opted to tax.

10.8 Indemnity payments

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.

10.9 What if rent adjustments are needed when a building is sold?

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:

10.10 Dilapidation payments

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.

10.11 What if I refurbish a building having received a dilapidation payment?

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:

• if the refurbishment works are used exclusively in making taxable supplies, then the related input tax is wholly recoverable;
• if the refurbishment works are to be used exclusively in making exempt supplies, then the related input tax is wholly irrecoverable;
• if the refurbishment works are to be used in making both taxable and exempt supplies, then related input tax is residual and should be recovered in accordance with your normal partial exemption method. See Notice 706 Partial exemption for more information.

11. Service charges on commercial buildings

11.1 What are service charges?

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.

11.2 What is the liability of leasehold service charges?

If, as a landlord or licensor, you provide services of a general nature to your tenants the service charges normally follow the same VAT liability as the premium or rents payable under the lease or licence (normally exempt, unless you have opted to tax). For the service to be considered of a general nature it must be:

(a) connected with the external fabric or the common parts of the building or estate, as opposed to the demised areas of the property of the individual occupants; and

(b) paid for by all the occupants through a common service charge.

11.3 What if I supply services to freehold occupants?

If you provide services to someone who owns the freehold of a building your charge is always standard-rated. This is because there is no continuing supply of accommodation that the service charge can be linked to.

11.4 What if I supply services to the occupants of holiday accommodation?

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.

11.5 Services provided by someone other than the landlord or licensor

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 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.

11.6 Payments collected by a tenant for the landlord

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.

11.7 Other charges made by landlords to tenants

As a landlord you may make charges to your tenants for items other than general services. These charges tend to fall into three categories:

• further payment for the main supply of accommodation, and follow the liability of that supply (normally exempt, unless you have opted to tax);
• for supplies other than accommodation (normally standard-rated); or
• disbursements (outside the scope of VAT). Further information on disbursements can be found in Notice 700 The VAT Guide.

The rest of this paragraph outlines the VAT treatment of some of the most common charges.

11.7.1 Insurance and rates

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.

11.7.2 Telephones

If the telephone 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.

11.7.3 Reception and switchboard

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.

11.7.4 Office services

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.

11.7.5 Fixtures and fittings

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 standard-rated.

11.7.6 Electricity, lighting and heating

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 credit 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. See Notice 701/19 Fuel and Power for more information.

11.7.7 Management charges

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.

11.7.8 Recreational facilities

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.

11.8 Shared premises

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 appropriate shares 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 telephone 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.

12. Service charges on dwellings

12.1 The basic position

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:

• they are required to be paid by the leaseholder or tenant to the landlord under the terms of the lease or tenancy agreement.

This is because the service charge is treated as ancillary to the main supply of exempt domestic accommodation.

12.2 What if I provide services to freehold owners of dwellings?

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, if the residents cannot refuse this; 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.

12.3 What if the landlord supplies additional services to occupants?

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.

12.4 What if a managing agent provides services to occupants on behalf of a landlord?

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.

12.5 What if a tenant-controlled management company provides the services?

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 because it relates to the service provider’s supply to the tenant-controlled management company.

Do you have any comments?

We would be pleased to receive any comments or suggestions you may have about this notice. Please write to:

HM Customs and Excise
Land and Property Team
4th Floor West
New Kings Beam House
22 Upper Ground
London
SE1 9PJ

If you have a complaint or suggestion

If you have a complaint about our service, or a suggestion on how we can improve it, you should contact your local office or the port or airport. You will find the phone number under “Customs and Excise - complaints and suggestions” in your local phone book. Ask for a copy of our code of practice on complaints (Notice 1000). You will find further information on our website at http://www.hmce.gov.uk. If we cannot settle your complaint to your satisfaction, you can then ask the Adjudicator to look into it.

The Adjudicator, whose services are free, is an impartial referee whose recommendations are independent.

The address is:

The Adjudicator's Office
Haymarket House
28 Haymarket
LONDON
SW1Y 4SP

Phone: (020) 7930 2292
Fax: (020) 7930 2298
E-mail: adjudicators@gtnet.gov.uk
Internet: http://www.adjudicatorsoffice.gov.uk/

Update 1 - December 2003

This slip amends the guidance on licenses to occupy land in respect of vending and amusement machines.

Update 2 issued April 2005

This slip updates the Notice by:

• amending the guidance in paragraph 7.6 on free supplies of land and buildings and
• providing the background of legislation relating to a new form of land tenure, commonhold, and reforms to leasehold and explaining how the related transactions are to be treated for VAT purposes) and inserts a new Section, 13 as follows:

Update 3 issued July 2006

This slip updates the notice by:

• clarifying the guidance in paragraph 7.8 regarding land and buildings on hand at deregistration
• amending the guidance in paragraph 10.1 on inducements paid by landlords to prospective tenants
• correcting a typographical error in paragraph 10.7 relating to surrenders by agricultural tenants
• clarifying the position in paragraph 11.7.6 for landlords who operate secondary credit meters for electricity and gas and charge tenants for the electricity or gas they use.

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