VAT and land transactions: response to call for evidence

The government has published its Summary of Responses to the Call for Evidence on simplifying the VAT land exemption published earlier this year. The government recognises that there was very little support for sweeping changes to the current rules and as such will not be taking forward any of the more significant changes put forward in the Call for Evidence in the short term. Instead, immediate action will focus on improving HMRC guidance in a number of specific areas.

However, the Response document still holds out the prospect of some broader changes in the future. In particular, the government intends to further consider the possible introduction of a definition for short term interests in land and has not entirely ruled out making most supplies of land subject to VAT with a limited number of exceptions. The government intends to continue to explore these option with stakeholders during 2022.

Background

In 2017, the Office for Tax Simplification (OTS) looked at the options for simplifying the VAT rules as they apply to land transactions, but in the end concluded that none of the options put forward could be recommended. The government nevertheless determined that the time is right to take another look at options for simplification, including those considered and rejected by the OTS.

Transactions in land are, in principle, exempt from VAT subject to a number of specific exceptions and subject, importantly, to the operation of the "option to tax". However, the Call for Evidence pointed out that the number of exceptions had grown from an initial four in 1973 to fifteen now, with detailed notes and exclusions to those exceptions. This can make it difficult for businesses to determine the correct VAT treatment of the transactions they undertake in the absence of specialist advice.

The option to tax can simplify matters for taxable businesses by ensuring that their land transactions are mostly subject to VAT, but involves a significant administrative burden for businesses and requires complex anti-avoidance legislation.

In addition, the Call for Evidence noted that there can be a significant grey area between determining what is a supply of land and what amounts to a supply of facilities.

As well as asking respondents to consider the three options originally put forward by the OTS in 2017 (removing the ability to opt and making all transactions exempt, removing the option to tax and making all land and property taxable at a reduced rate or making all commercial land and property taxable at the standard rate with an option to exempt), the Call for Evidence also floated suggestions for simplifying the current rules by either making most supplies subject to VAT, and exempting specific supplies, by defining short-term or minor interests as subject to VAT or by linking the VAT liability to registration of interests at the Land Registry.

Response document

The response document reports that on balance, a majority of respondents urged caution over sweeping changes to the current rules, favouring more targeted attempts at simplification in specific areas of land and property VAT. As such, the government has rejected any suggestions (in the short term at least) of taking forward any of the more radical options outlined in the Call for Evidence. In particular, an overwhelming majority of the responses rejected all three of the options outlined by the OTS, with respondents stating that the OTS were correct in their decision to discount these proposals.

There was considerable support for more targeted action on specific issued identified by respondents. However, it appears that these covered a wide-range of issues. It is perhaps unsurprising in this context that the single most common issue identified involved the anti-avoidance rules for the option to tax, which was mentioned by over 25 per cent of respondents. Other aspects of the option to tax were also identified including the lack of any direct record of an option to tax. Other areas that were identified as potentially benefiting from simplification measures were:

• short-term arrangements, such as trading concessions, serviced offices and conference facilities, where it is unclear if the supply should be treated as a property letting or as the provision of facilities;
• mixed-use developments that include both commercial and residential areas, such as student accommodation with ground floor retail; and
• treatment of rights to light, call options and dilapidations where HMRC’s guidance and overall position is said to be unclear.

As regards the suggested definition of a minor or short-term interest in land (to be taxable), opinion from respondents was divided, with most respondents able to identify both advantages and disadvantages to defining minor and short-term interests. Those in support tended to suggest that defining minor and short-term interests would offer more certainty, whilst those in opposition believed that changes could result in new confusion and further complexity.

As regards the suggestion that the VAT treatment of land should be tied to registration at the Land Registry, respondents were again overwhelmingly negative. As a result, the government accepts that the potential option of linking the VAT treatment to an independent land register would be ineffective, and probably inoperable, and will therefore not be considering this further. However, there was significant support for a dedicated online database or register which (a) links VAT liability of interests with other tax matters and (b) remains widely accessible.

Future actions

Although the government has decided not to take forward any of the more radical proposals for reform, the response document does accept that there is significant room for improvement in HMRC’s guidance in a number of areas. In particular, these include the the treatment of dilapidations, call options, overages and rights of light. The response reports that HMRC has set up a working group with members of the Land and Property Liaison Group with the aim of producing guidance for HMRC compliance officers that will also provide certainty for businesses in these areas.

In particular, the updated guidance relating to dilapidation payments is due to be published early in 2022. On overages, the joint working group is working to produce updated guidance for officers and businesses to follow. There is already some guidance available on call options, which has not changed. However, HMRC’s position in some specific cases, including those in litigation, has created uncertainty and doubt. HMRC is currently considering this and will provide clarification in the new year. Work on providing guidance on rights of light has not started yet. HMRC intends to engage with the working group on this issue once sufficient progress has been made on the other areas

In addition, the government intends to further explore whether it is possible to establish a workable definition of “short term” or “minor interests” with a view to making such supplies subject to VAT. If establishing such a definition is possible, the government would then further consider the implications of making such a change with business.

More radically, the government would like to discuss further the implications of making most supplies of land subject to VAT with a limited number of exceptions. This is by far the most significant change of the potential options. However, it would also be the most challenging to develop and introduce in the short to medium term, and the government would therefore like to understand more fully these challenges and any unintended consequences before making any decisions. As part of continued engagement with businesses, the government has indicated it may also look to discuss other suggestions raised by respondents in the response document. These included the request for HMRC to establish a more comprehensive and accessible register of existing options to tax and reviewing the anti-avoidance rules relating to the option to tax.

Further discussions with businesses are intended to begin in the early part of 2022.

Comment

Radical reform of the VAT rules applying to land transactions is off the table for now. Instead, there is some hope that further and better guidance will be produced by HMRC in certain discrete areas of difficulty. However, recent experience with the updated guidance around compensation payments, including the VAT treatment of dilapidations, will not entirely fill taxpayers with confidence that this will be achieved.

More generally, the government will continue to engage with taxpayers on a range of options. At the extreme end this could still result in radical reform in the longer term, but perhaps in the shorter term may hold out the prospect of both administrative easements (in the form of a register of options to tax) and some welcome legislative simplifications (around the notorious anti-avoidance rules in relation to the option to tax).