Simplifying VAT land exemption – will HMRC’s review succeed?

Anyone labouring under the illusion that VAT is the simple tax that it was first designed to be, need only dip a toe into the world of property development to realise their mistake. Complexity here has grown over the years, and in particular when the VAT ‘option to tax’ was introduced in 1989 which allowed businesses to decide whether or not to add VAT to certain supplies of property. The following years saw even greater complexity as the scale of the benefit or cost of this decision dawned, and the rise of VAT planning using options to tax led HMRC to introduce anti-avoidance measures that need a compass and a trail of breadcrumbs to navigate.

The Office of Tax Simplification (‘OTS’) has taken notice of increased complexity in VAT and their report of November 2017 suggesting that the VAT regime is both complex and poor at keeping up with the economy prompted HMRC to seek views on how land and property exemption can be simplified.

HMRC suggestions include:

• Removing the ability to opt and making all relevant transactions exempt

• Removing the option to tax and making all land and property taxable at a reduced rate

• Making all commercial land and property taxable at the standard rate with an option to exempt

• Defining minor and short-term interests in land and property as always subject to VAT

• Make most supplies subject to VAT mandatorily and exempting only a few specified supplies

• Defining VAT treatment by reference to Land Registry registration

Wholesale changes to the exemption looks unlikely as this would be such a seismic change that it could take years before the new rules bed in and the potential for errors in the meantime would probably scare both HMRC and taxpayers equally. But simplifications around some of the measures would, we believe, be welcome to all and could be achieved without too much aggravation, e.g. simplifying the anti-avoidance rules.

While its difficult or impossible to predict HMRC future policy for VAT, it seems to us that VAT exemption for land and property warrants this review and, if HMRC has any appetite for tax simplification, this is an excellent area to demonstrate that.

Taxpayers should take note and keep an eye on announcements about any changes. The long-term nature of property development could mean that changes to be implemented in future years will have an impact on investment decisions taken now.

In the meantime, Centurion is perfectly placed to help those facing problems with the current VAT rules for land and property. Contact us at emailus@centurionvat.com if you would like to discuss any issues.

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