UK: What The VAT Rate Change Means For The Property Sector

The standard rate of VAT increased from 17.5% to 20% on 4 January 2011 but what does the rate change means for the property sector?

Commercial landlords

As a commercial landlord, the rate of VAT you charge depends on how you invoice your tenants and the relevant 'tax points' concerned.

Commercial rents invoiced in advance

The tax point for opted property rentals is the date you issue a VAT invoice or receive payment, whichever happens first. For example, if you invoiced a tenant for rents in advance, say in early December 2010, for a period commencing 25 December 2010 and ending 24 March 2011, you would have charged VAT of 17.5% on the entire rental due.

Commercial rents invoiced in arrears

Where the rent for the quarter ending 24 March 2011 is invoiced or a payment is received after 4 January 2011, VAT is due at 20% on the entire rental due. However, as the payment due may relate to a period which started before 4 January 2011, it is possible to apportion the rental amounts so that VAT is charged at 17.5% on the part that applies to the period prior to 4 January 2011.

Tenants

Tenants that have been invoiced prior to 4 January 2011 should have been charged 17.5% on their entire rent. This is applicable even where the rental period began before 4 January 2011 and spans the VAT rate change. Where a tenant receives an invoice after 4 January 2011, VAT at the 20% rate should be charged. However, the tenant can ask the landlord to apportion the invoice and charge VAT at 17.5% on the part that applies to the period prior to 4 January 2011, and 20% on the remainder.

Service charges

Service charges for rental properties will follow the same VAT treatment as rental income. Where tenants are invoiced for service charges in advance for a period which spans the VAT rate change, VAT will be due at 17.5 % if the invoice is issued before 4 January 2011. If service charges are invoiced in arrears, the charges may be apportioned and VAT accounted for at 17.5% on the part that applies to the period prior to 4 January 2011 only.

Sale of real estate

Leasehold

The grant of a lease is treated as having been supplied for VAT purposes on the date that it is granted which forms the 'basic' tax point. For the purposes of the VAT rate change, the basic tax point for a premium in respect of a lease is the date of the grant of the lease. If you issue a VAT invoice or receive payment after 4 January 2011 for a premium in respect for a lease granted on or before 3 January 2011, you can still choose to apply the 17.5% VAT rate to the premium. The supplementary charge under the anti-forestalling rules should not apply to lease premiums which are granted before the VAT rate change but invoiced or paid for after the VAT rate change.

Freehold

The basic tax point for a freehold sale of real estate is the date of the completion of the transaction. An earlier tax point is created where a VAT invoice is issued or part payment is made before completion, unless the deposit is paid to the solicitor as stakeholders for the vendor.

Stamp duty land tax (SDLT)

Any increase in the amount of VAT due on the freehold purchase will also impact the amount of SDLT that may be due as SDLT is calculated on the VAT inclusive value of the land/building being sold.

In the case of leases, the impact of VAT on SDLT charges will depend on whether the effective date of the transaction for SDLT purposes is before 27 July 2010 or not, and whether the rent is fixed for a period, or is variable, or uncertain.

Construction costs

Often construction services are invoiced at the end of each month based on certificates. The work carried out may have commenced before 4 January 2011 but is not completed until after that date. Unless payment is received or a VAT invoice issued before 4 January 2011, the whole supply should be charged at the 20% rate under the normal rules. However, you may, if you wish, apportion the services so that VAT at 17.5% is applied on the work done up to 4 January 2011, and 20% on the remainder. You will have to be able to demonstrate that the apportionment accurately reflects the work done in each period if queried by HMRC.

Anti-forestalling legislation is in place to restrict the prolonged use of the 17.5% rate of VAT to certain supplies of goods or services provided on or after 4 January 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.