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Land and buildings - opting to tax (VAT)

Environmental remediation prior to sale

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We're planning to sell some property for redevelopment that was owned long before introduction of VAT.  Prior to sale, we will be carrying out environmental remediation.

If we do not opt to tax, is recovery of input tax on the remediation cost likely to be blocked?  I think contractually, we are more likely to warrant that the remediation has been carried out rather than make it a contractual requirement to carry out the works - in theory at least, delinking the remediation cost from the sale.

thanks

 

Replies (15)

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chips_at_mattersey
By Les Howard
18th May 2022 11:58

Yes. The option to tax will allow recovery of VAT.
Is it a commercial property? Will the purchaser be able to recover the VAT charged? Are they likely to want to disapply your option?

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VAT
By Jason Croke
18th May 2022 12:28

Right to reclaim VAT is on the basis you make a taxable sale....if you sell land without an option, then the land sale will be exempt. Therefore, any input tax directly related to the land isn't recoverable (blocked).

If the business is VAT registered and makes taxable sales, the land sale is still an exempt sale and so the business is partially exempt, it needs a partial exemption calculation, which will see you directly attribute remedial land costs to "wholly related to the making of an exempt supply" and therefore not recoverable, perhaps some recovery if calculation comes out as de minimis, but unlikely.

Not sure you can "delink" the remediation from the land sale, because for VAT, you would be saying your input input tax (remedial) has nothing to do with the sale of the land and everything to do with the VATable side of your business? That seems a stretch as the input tax is clearly linked to the sale of the exempt land, can't see how the costs could be linked to the general taxable side of the business.

opting to tax the land will mean the sale is subject to VAT, you've made a taxable sale and so the input tax (remedial works) is fully recoverable, but the buyer may not be too happy as they now need to find another 20% plus the SDLT will also be higher as SDLT is based on VAT inclusive price. So buyer may no longer want to buy......so whether to opt will come down to lost input tax on remedial v loss of buyer.

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By paul.benny
18th May 2022 12:43

Thank you both. And also for the reminder that SDLT is on the gross price.

The site is an industrial property that will be redeveloped, so I would expect the buyer to be able to recover the VAT suffered

Is the remediation linked to the existing business or the sale? I would argue that as the contamination was caused by the existing business, the constructive obligation to remediate sits in the same place. I don't currently know the legal obligation (ie would we have to remediate if we weren't selling).

That said, it's HMRC I would have to convince and I'm less confident of my chances of winning that argument.

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By More unearned luck
18th May 2022 12:53

If the land has been owned since before 1973 then presumably it has deteriorated in your client's ownership and if so as a result of its trade then is not the cost of remediation a cost component of its (taxable?) supplies?

I've supposed a lot of things owing to the dearth of facts in the question.

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Replying to More unearned luck:
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By paul.benny
18th May 2022 13:52

That's what I said above. What additional facts might alter the conclusion?

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VAT
By Jason Croke
18th May 2022 14:24

Hmm, okay.

The remediation works, to me, are still linked to the sale of the land but never say never!

If you were clearing up the site with a view to extended the factory or turning into a carpark, then there is a direct link between the costs and ongoing taxable activities of the land....but I get your point that the remediation being related to the historical (taxable) activities of the business.

Sort of useful case, linking to the Deloitte page as the summary is useful and there is a link to the full case within the summary. The Harewood Trust https://www.taxpublications.deloitte.co.uk/tis/dtp.nsf/0/04DF543305AC96A...

If the remedial works are contractually required before the sale, then that more likely links the works to the exempt sale. If there is no obligation to do the works but you do them anyway, not sure if that changes the position - why would you tidy up a site you are about to sell/get rid of? On saying that, if there was no land sale and the business did some remedial works because it wanted to clean up its back garden, that would be recoverable as a cost of the on-going taxable activities of the business and then if it just happens to sell the land later, would that then be subject to a clawback on the basis the intention changed.

Not sure there is a simple answer, guess it depends on the values involved/timings, I've just skimmed through my Bloomsbury VAT guide and nothing specific in there other than the repeated mantra that input tax is recoverable when there is a direct and immediate link between the costs and the supplies made.

HMRC manual on direct and immediate links here
https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit21000

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Replying to Jason Croke:
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By paul.benny
18th May 2022 15:07

Thanks again, Jason. I can see it would not be easy to justify input tax recovery on remediation cost if the property sale is Exempt.

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paddle steamer
By DJKL
18th May 2022 15:55

If remediation costs are vast, as sometimes they are, is the site to become residential/ do you have planning etc?

If it is do you have any scope to actually commence the residential development (issue works commencement notice re extant planning) and manage to have the remediation works supplied to you as a zero rated supply in furtherance of same?

Will be a waste of time if they are not significant but if a lot of money involved I would visit a vat pro to see if he/she can devise a different way to skin the particular cat.

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Replying to DJKL:
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By paul.benny
18th May 2022 16:14

Good thought. And as you say, many ways of achieving the result and definitely one to put in front of our paid advisers.

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Replying to paul.benny:
paddle steamer
By DJKL
18th May 2022 16:26

The catch though is always being too clever by half and queering the sale deal, which after all is the reason anything is to happen in the first place.

Over the years I have been advised with some wonderful ways to deal with tax re property projects only to fall back to earth as the tax planning/approach scares the **** out of the prospective purchaser who then wants to run for the hills. (can also often scare the odd banker)

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By tedbuck
23rd May 2022 11:16

As the developer will presumably be VAT registered can you not reduce your price to him by the remediation costs? You will be in the same net position, he will save SDLT on the remediation costs and should be able to recover any VAT thereon as part of the development costs.
Won't everyone be happy?

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Replying to tedbuck:
paddle steamer
By DJKL
23rd May 2022 11:49

Catch likely is the remediation works will not be fixed price (I believe these days virtually nothing is fixed price in construction), accordingly purchaser possibly takes on the business risk of extra cost.

It might work if part of purchase price was placed in escrow re the works costs, but then you add yet one more thread to the deal and the more complexities added the more chance the overall deal gets scuppered.

We have found that the simpler our property deals the more chance they actually complete. (When we were buyers we always made our offers as clean and simple as possible)

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Replying to tedbuck:
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By paul.benny
23rd May 2022 13:32

I've joined the business with the deal in progress (heads of terms agreed) and am having to deal with the consequences - and with having incomplete information.

I've now learnt that although we have occupied the premises for decades, the purchase was more recent and was opted to tax at that point.

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Morph
By kevinringer
30th May 2022 10:05

I'm guessing the cost of environmental remediation going to be more than the partial exemption de minimis (must be less than £7500 VAT for the year and less than half total input tax)?

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Replying to kevinringer:
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By paul.benny
30th May 2022 10:29

Oh yes. And as noted, I have now learnt that an option to tax is already in place

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