Whenever a transaction takes place, a lawyer will also have to consider the implication of VAT or Value Added Tax. This is chargeable with respect to the supply of goods or service made during the business. The supply of goods can either be exempt, zero-rated, or standard rates. As the name suggests, exempt supplies means that tax is not applicable, zero rated means that the supplies are chargeable but VAT is not valid, and standard rated means that the supplies are subject to VAT at the current rate. Currently VAT is charged at 20%.
VAT paid by businesses on the supplies made to it can be recovered from the HMRC when it is proved that it was incurred in making taxable supplies. The VAT charged by a business on the goods that it supplies has to make accountable to the HMRC. However, in reality, the input tax paid in making those goods is deducted from the output tax and only the remaining is paid. This is locally called recovering the VAT.
VAT affects property sale in the following manner:
- A sale of green field site is exempt from VAT,
- Construction and civil engineering jobs incur zero rated tax,
- Legal and other professional charges are subject to standard taxes,
- But the sale or the lease of a new house is subject to zero rated taxes.
The Option to Tax:
But when supply of goods that comes under the exempt category is made, the corresponding input tax cannot be recovered. The option to tax is allowed to enable a person convert an exempt tax into a taxable one and recover input tax. For instance, if a person has incurred VAT on the construction of the property, he is allowed to recover the VAT at the time of disposing the property.
VAT and Residential Property:
Application of VAT in residential property is pretty uncomplicated. A new house on sale carries zero rated tax, but the subsequent sale of the house shall not be made in the course of the business. So the seller will not be charging anything by way of VAT in both instances.
Land bought by a developer comes under the exempt category, unless the seller chooses to charge tax. Even the construction work is zero rated, so no input tax is paid. And when the property is sold, the sale is zero rated and hence taxed at zero percent. Thus the developer can recover input tax from the HMRC.
VAT Sensitive Buyers/ Tenants:
Buyers or tenants that make only standard or zero rated supplies will not be affected by a charge to VAT on the purchase price, since they can recover the VAT from the output VAT. But for business that make only exempt supplies, the rent or the purchase price they pay cannot be recovered. Such people may seek a reduction in price or rent.
Conveyancing Points:
When VAT is chargeable on the property, it is important that is documented properly. It is generally accepted that a price is inclusive of VAT unless otherwise mentioned.
Photo courtesy: hamblyhouse
