I’ve recently been advising a couple of clients about VAT and property transactions that should end up with no VAT cost (or minimal VAT cost) to the developer or HMRC. One of my clients, who owns a very successful residential property business, was asking about the use of the VAT 1614D certificate, whether it really matters if the circumstances don’t fully meet the criteria and why the procedures are so important. So I wanted to write about the subject of buying opted properties VAT free and why it’s so important that the proper procedures are followed.
Does it really matter if the transaction would be “VAT neutral”?
My client used an interesting phrase – which was whether it really matters whether the VAT 1614D certificate is correctly used on the basis that the situation is “VAT neutral”. For example, if you sell something to a VAT registered business who can claim the VAT on its VAT return, then in principle the effect all round is “VAT neutral”. The vendor charges VAT, collects the VAT from the customer and pays the VAT to HMRC. The customer pays the VAT and claims the VAT from HMRC. In my client’s case, the company converts existing commercial properties to dwellings and sells long leases in the dwellings, making zero-rated supplies. The company would be able to claim VAT paid on the purchase if the vendor had to charge VAT because the company did not issue the VAT 1614D correctly.
Probably about 99% of all business to business transactions are “VAT neutral” because their sales and purchases fall within this scenario, the main exception being sales to exempt or partly businesses who can’t claim VAT on their purchases, in which case the VAT becomes an additional cost.
The procedures
Most business transactions are relatively simple for VAT purposes, the main distinction being whether or not the purchaser can claim the VAT. However there are two specific situations when what SHOULD be a VAT neutral transaction isn’t, simply because the parties involved haven’t followed specific procedures. Not only can you end up with unexpected VAT costs, but trying to sort it out after the event can be extremely different
Transfers of going concerns
The first of these is the sale of business assets as a going concern, when the sale could qualify as the “transfer of a business as a going concern” (“TOGC”) as explained in VAT Notice 700/6: Transfer of a going concern: http://tinyurl.com/oskp9zz. This applies to all types of assets, not just property. In fact the rules about the sale of property businesses as a going concern are particularly complicated, especially if you’re selling or buying a property rental business or if the transaction involves commercial property where the vendor has opted to tax the property.
The main point about TOGCs is that if the vendor charges VAT in error, then the purchaser can’t claim the VAT charged even if the purchaser will be using the assets to make taxable supplies. This applies even if the vendor has paid the VAT charged to HMRC. That’s why it’s essential that both parties understand the TOGC procedure and get the VAT accounting correct.
If the transaction involves the sale of a property rental business or commercial property, the procedure is even more complicated and the fact that they often involve very large value assets means that the potential VAT cost in itself can be difficult to manage. If you’re selling an opted commercial property for £1m, then having to fund an additional VAT cost of £200,000 through the VAT system is an additional funding burden.
VAT 1614D certificates
The other procedures – and probably the most common – is the use of the VAT 1614D certificates. Many of you will know how this procedure works – if a purchaser wishes to buy an opted commercial property to convert into dwellings, then the vendor must issue the VAT1614D certificate to the vendor before the price is legally fixed and the vendor is required to sell the property exempt from VAT.
The detailed rules about the procedure is in HMRC VAT Notice 742a: Opting to tax land and buildings, section 3 http://tinyurl.com/qbrewhq.
HMRC has always been very vigilant about the application of the TOGC rules. In recent years, they have become increasingly vigilant about the use of the VAT 1614D certificate, sometimes validating the purchasers’ declaration of intention to convert by contacting the purchaser for more information even years after the sale was completed. I do get a lot of queries about this issue – for example, can a potential buyer use the procedure even if their planning application is refused? The answer has to be yes, because the law doesn’t give you the option of saying that you INTEND to convert into dwellings ONLY if you get planning permission.
Getting it wrong
So what exactly is the problem if you issue a VAT 1614D certificate in the wrong circumstances?
Well, first of all, it’s an offence and you’d be breaking the law. HMRC may issue penalties.
The second reason is the simple palava of trying to rewind things to sort it all out after the event. Your vendor would have to issue a VAT invoice and you would have to find the money to pay the VAT. It may also affect the original stamp duty land tax liability and you may have an additional amount to pay. There would be the cost of solicitor’s fees and chances are you’d end up footing the bill for the vendor’s costs as you’d be at fault.
You can also be assured that HMRC will review the circumstances of every other VAT 1614D certificate you have issued and this will cause a lot of hassle even if they don’t find any other situations where you’ve issued a certificate incorrectly.
If you can’t issue a certificate….
The purpose of the VAT 1614D procedure is to remove the burden of VAT from residential properties, particularly dwellings, by ensuring that the vendor does not charge VAT on the sale of commercial property. There will, however, be situations where you can’t validly issue a certificate – perhaps you intend to hold onto the property to see if you can get planning permission and then sell it with planning permission. As you don’t INTEND to convert the property yourself, then you can’t issue a VAT 1614D certificate and the vendor will have to charge VAT.
It’s at this stage of things that you need to consider taking professional advice and do some sensible VAT planning to ensure that you don’t end up with irrecoverable VAT that could have been avoided.
Marie
February, 2017