Land services and VAT pitfalls

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Neil Warren explains the correct VAT treatment for services involving overseas landlords, by way of a case study.

Russian connection

Boris and Olga (B&O) are a married couple who live in Moscow. They want to invest in UK commercial property – buying, renting and hopefully selling at a profit. As the properties will be purchased in their joint names, this is a partnership as far as VAT is concerned (see VAT Notice 742, para 7.2).

Finding a property

As a starting point, B&O paid a UK-based property expert £10,000 to advise them which would be the best area of the UK in which to buy property for long-term investment growth. The expert (who is VAT registered in the UK) has recommended Leeds, an up-and-coming city with potential for long-term growth, and identified three potential properties just outside the city centre.

The expert’s fee charged to B&O will be outside the scope of UK VAT under the general business to business (B2B) rule. The place of supply is the customer’s country, ie Russia. You might wonder why the place of supply is not the UK, where the expert is doing all of her research. The reason is that for most B2B services (and B&O are clearly operating as a business), the place of supply is where the customer is based. However, see my comments below about the land exception to the basic B2B rule.

Buying the property

B&O have decided to buy the freehold of an office block in Leeds for £1m. It will be purchased as a vacant property, and tenants will be found once they have spent £100,000 + VAT on building repairs and improvements. The seller has an option to tax in place on the property, so he will charge £200,000 VAT on the sale.

B&O will need to register for UK VAT as an overseas trader in order to claim input tax on the purchase of the building and subsequent improvements. They must opt to tax their interest in the building so that output tax is charged on future rent. They do this on form VAT1614A  which is submitted to HMRC at the same time as the application to register for VAT.

Services involving land

You might wonder why the £100,000 + VAT being spent on building work will be subject to UK VAT when the partners live in Russia. The reason is that the place of supply for a land service is where the land or property is located - Leeds in this example. The general B2B rule is no longer relevant.

But hang on, I hear you ask, why were the services of the property expert not subject to UK VAT? The reason is that she was not providing a service linked to a specific property. She was effectively providing a general consultancy service: in this case, invest in Leeds and not London.

Other costs

As well as building works, the following costs will also be subject to UK VAT in my case study:

  • managing agent fees, conveyancing costs, estate agent fees when the property is sold
  • services of architects, surveyors and other professionals which directly relate to the property

Services of UK accountants and tax advisers

What will the VAT position be if B&O appoint a UK accountant to prepare annual accounts for them on their UK property portfolio and to complete UK VAT and tax returns?

  • The letter of engagement with B&O will specify their Moscow address. The day-to-day communications will also be linked to their Russian base, as they will deal with emails on their computer in Moscow.
  • The seat of a business is described in VAT terms as a ‘business establishment’. The investment property in Leeds is not a business establishment, so is ignored as far as the place of supply rules for non-land services are concerned.
  • The accountancy and bookkeeping services are covered by the general B2B rule, so no UK VAT is charged by the accountancy firm on its services – the place of supply is Russia.  
  • For further information see VAT Notice 741A, para 3.3 and section 7.

Final warning

The land services rules work both ways. If, for example, you have a UK-based client who undertakes building work on properties in Ireland for customers who do not have an Irish VAT number (where the reverse charge could be applied), then your client will need to apply for an Irish VAT number. This is because a zero registration threshold applies to supplies made by a business outside of its own country. So a UK builder who repairs a bathroom tap at a house in Dublin for a private individual and charges £20 will need an Irish VAT registration!

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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By Cohan
13th Feb 2018 13:34

Hi Neil,
What is the position if the Russians bought a residential
property instead to collect rental income.

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to Cohan
18th Feb 2018 22:49

Completely different- I think that's a question that deserves a whole separate blog post to answer...

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From an #Advisory perspective wouldn't it be more tax efficient for B&O to form a UK company and invest in the property through it. They would be shareholders of a UK company, making any input VAT charges to be reclaimable. And as from a cost efficiency perspective, the issues with recent mortgage structuring and tax allowable costs, it could also go along way to mitigate income tax risk exposure.

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