VAT considerations for planning changes

The new government has announced major changes to planning law, releasing many more sites for residential development. Potential vendors, purchasers and their intermediaries will be looking to secure rights to these opportunities with option and overage agreements. However, the VAT consequences of these need careful thought.

The Labour Party’s manifesto promised major changes to planning law and further announcements were made in the first few days of the new government. Measures include allowing redevelopment of more brownfield sites and the so-called ‘grey belt’, recruiting more planning officers and increasing the building capacity of housing associations.

At the same time, recent significant changes to how we live, work and shop have left some property owners with surplus land. These landowners are not just commercial property investors, but many owner-occupiers who simply do not need as much space.

However, it will take months, even years, for some of these changes to be enacted and then work through to a local level. Given this, housebuilders, housing associations and other developers may not wish to commit to acquiring a site yet; but want to secure their access to a site with a call option. Equally, landowners may wish to take some of the benefit if the market rises fast, agreeing on an overage payment if sales exceed a certain level. This whole deal may be facilitated by a promoter.

The VAT treatment of these transactions can vary depending on the actions of the parties, and HMRC’s view of some of these arrangements remains unclear.

Should you charge VAT on the sale?

Landowners may be surprised to find that they often have a choice whether to charge VAT on the sale.

The default position is that the sale of land is exempt from VAT. However, a landowner can ‘opt to tax’ so that it becomes subject to VAT. If the land has been rented out previously, the business may already have opted for it; but if it has only been used in the business this is unlikely.

We often find that businesses have been allowing someone to occupy part of their property for many years, charging VAT on a small rent, but cannot find any firm confirmation that they have notified HMRC of a decision to opt to tax.

Just because VAT has been charged does not necessarily mean the property has been opted. Some rents are always taxable, like car parking spaces; or an assumption could have been made that VAT should be charged as the business charges VAT on all its other income. Establishing the position can take some time, so is worth considering at an early stage. 

Even if the business has opted to tax, some land sales can still be exempt. In particular, a registered housing association can agree to provide the seller with a certificate which ‘disapplies’ the option to tax they have made.

By opting to tax, the owner can recover VAT on related costs. The largest of these amounts is likely to be VAT on the promoter’s fee, but there will also be legal and professional fees. If the business acquired the land, or did significant work to it, in the last decade, VAT previously recovered can also become repayable if the land is sold as exempt.

However, charging VAT is likely to be an issue for the buyer. If the buyer is a commercial housebuilder, they should be able to recover this VAT in full; however, SDLT is calculated on the VAT-inclusive amount, so it will increase this tax cost to them. If the buyer is a housing association, they are typically able to claim relief from SDLT, but cannot recover VAT.

Therefore, the decision can often come down to a choice between someone suffering a VAT or SDLT cost.

Is VAT due on a call option?

HMRC’s publicly stated view is that the VAT treatment of the grant of an option to acquire property is the same as the VAT treatment of the acquisition itself. However, in 2020 HMRC took a different approach in Landlinx Estates, arguing (against its own published guidance) that this was not a supply of an interest in land, and so was always taxable – regardless of whether the landowner had opted to tax. The First-tier Tribunal disagreed, noting the obvious tax avoidance opportunities if the treatments were different. HMRC did not appeal the decision and are understood to be clarifying their guidance in line with the decision, but this is still awaited some four years later.

This still leaves the potential for the parties to change the VAT treatment between the call option and the actual sale. The seller might opt to tax, the purchaser might do something which disapplies the option to tax, the purchaser might assign its call option to a party with different plans, to name but a few scenarios. It is hoped that HMRC will have clarified its position before these situations arise over the next few years.

Is VAT due on an overage payment?

Unfortunately, this is another area where there have been many years of uncertainty as to HMRC’s position.

Where part of the price payable is uncertain at the time when land is sold (e.g. land is sold for £X + Y% of the sale proceeds of each dwelling), then generally for VAT it is treated as if there are several sales, one every time a payment is received.

This can lead to a situation where different VAT treatments are applied to different payments for the same land. For instance, if the landowner had opted to tax, their initial payment when they sold the land would be subject to VAT. However, the overage payments when each flat is sold would be exempt, as the land is now dwellings and an option to tax does not apply to residential property.

HMRC have been reviewing their policy in this regard and it is possible that the law and/or practice may change here in the future; although recent indications are that HMRC will maintain the above approach.

How future overage payments are treated can affect VAT recovery, and for some landowners may determine whether they need to remain registered for VAT.

What about promoters?

Many landowners will not have the time or expertise to bring their land to market for development, and an intermediary is likely to be involved. A ‘promoter’ may pay the landlord for exclusive rights to market their property. If successful, the promoter will typically receive a percentage of the land sales value – again some of this may be deferred and contingent on final planning achieved and house prices. Who charges VAT, when, and whether this is recoverable also needs to be considered carefully.

Conclusion

Selling surplus land can be a great way to release significant cash from a business and create a leaner, more efficient business for the future. With the new government committing to building 1.5 million new homes and making changes to the planning system to enable this, demand for land is clearly going to increase. However, care needs to be taken over VAT and other taxes to ensure that the best result is achieved.

To hear more about VAT on options, overage and promotion fees, join our webinar series Getting Ready to Develop Again.