VAT treatment on property disposal

VAT treatment on property disposal

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Hi,

I have a client who acquired a pub around 4 years ago.  When he bought it he paid VAT (on 90% of the consideration, as standard with pubs).

He is VAT registered, and reclaimed the input tax on the purchase.  It was over £250k so fits within the capital goods scheme.  He refurbished the pub and traded it as such up until this point (all standard rated supply).

He did not opt to tax the property.

4 years on, and he now wants to sell part of the land attached to the pub.

It is my understanding that as a supply of land/building, this is exempt from VAT. (VAT notice 742A, p1.3) though I appreciate that he will have to repay a proportion of the input tax he reclaimed on purchase under the capital goods scheme, as he has only been making taxable supply for 4 years.

There are 2 queries:

Firstly and most importantly - am I correct in thinking the part disposal of the property is exempt from VAT? His potential buyers are wanting indemnity against him trying to charge them VAT at a later date.  Based on it being exempt I don't see how this is an issue, but both the buyers' accountant and the solicitor's accountant seem to think there should be VAT chargeable on it. I'm not sure why unless I've missed something.

Secondly, and an issue for later... I'm not sure of the correct method of calculating the input tax repayable!  There was no split when the property was bought, and when he bought it, the bit of land was basically scrub land.  In his words 'if they had tried to charge me an extra £10k for it, Id have told them to keep it'.  The total purchase price was in the region of £300k, so it made up less than 5% of the cost.

Since then, planning permission has been granted on that bit of land and it has increased in value significantly!  If valued today, it may make up closer to 30% of the total value.  My argument would be that a fair way of splitting it is on the basis of the value at the time he actually reclaimed the input tax they will want back.  Has anyone had experience of HMRC's likely view on this (if they actually look into it!)?

Thank you

Replies (3)

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By shaun king
08th Oct 2014 17:26

CGS et al

If no option to tax has been exercised the sale of the land is Exempt. As to the CGS calculation you are looking at an apportionment of the Input tax incurred, so I would argue that is based on values at time the Input tax was incurred. Maybe you look at alternative calculations other than just value!!

Thanks (1)
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By Penguin78
08th Oct 2014 18:39

Thankyou

Thanks for your reply Shaun.

I have considered other types of apportionment such as area etc, but genuinely, value at time of acquisition seems the most fair split - it's just convenient that that method is also the most favorable to the client!

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By The VAT Doctor
09th Oct 2014 00:01

Opted?

Looking back at the original purchase, did your solicitor confirm the vendor had opted to tax the pub (building) and the land or just the building?  I am thinking, was there any input tax attributable to the land if it was just scrubland?

The notice talks about using market value, presumably now, which does not seem fair and reasonable.  Basically, you are trying to determine the change in use of the input VAT claimed.

Agree with Shaun, you could use the values when purchased, or floor area, or anything really that reflects that the use for exempt purposes is low.

Thinking 'outside the box', and assuming the land is being sold for housing, could the owner now build up to foundation level, using the contractor as a supplier, and then sell partly completed to the buyer?  this would be a zero-rated supply, and the buyer can zero rate their sale too.

 

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