Land Compensation Manual Section 18: Value Added Tax on land and buildings

Section 18: Value Added Tax on land and buildings

The Valuation Office Agency`s technical manual covering all aspects of compulsory purchase and compensation.

Basic principles

18.1 General

Value Added Tax (VAT) is a self-assessed tax on the final consumption by the ultimate consumer, collected at each stage of purchase and sale.

VAT is aimed at all businesses - it is a transaction based tax. Only people in business can charge VAT and, in general, only businesses can recover VAT charged to them, but some businesses cannot recover all or part of the VAT that they incur.

The basic principles are relatively straightforward, but the tax has its own terminology which must be understood. In particular, the term ‘taxable’ means ‘subject to VAT’.

As a general rule the buying, selling and letting of residential property is not mandatorily subject to VAT but see paragraph 18.13 below as regards the construction of new dwellings.

18.2 Operation of VAT

The way the VAT system works is as follows:

A trader who buys an item (input) will receive an invoice showing the price plus VAT (input tax).

On selling a ‘taxable’ item (output) the trader will issue an invoice plus VAT (output tax).

If the output tax were greater than the input tax then the balance must be paid to HMRC.

If vice versa and the input tax were greater than the output tax (that is the trader has paid more VAT to suppliers than charged to customers) then the trader could claim the deficit from HMRC.

The tax equation will reflect supplies that are exempt or zero-rated (see paragraph 18.3 below).

18.3 Standard zero-rating and exempt supplies

Supplies may be standard-rated (currently 20%), zero rated or exempt. The important distinction between the last two is that whilst a trader who makes a zero-rated supply can claim a refund of any input tax paid in respect of that item, no such refund can be claimed in respect of an exempt supply. This can have an important bearing on whether or not a trader would elect to waive exemption (‘opt to tax’) on certain supplies (see paragraph 18.12 below).

18.4 Partial exemption

Situations arise where some businesses make both standard rated and exempt supplies in the course of their normal business. When this occurs the business concerned will need to attribute the supplies it receives between those that are used exclusively for making its standard rated supplies and those that are used in making its exempt supplies. In the case of the former all input tax is reclaimable whereas in the case of the latter none of the input tax is reclaimable.

Where however supplies to the business are used partially for standard rated supplies and partially for exempt supplies the input tax on those supplies needs to be apportioned between the two ultimate supplies. The provisions for making this apportionment are set out in HMRC Notice No 706 (16 June 2011) but need not concern valuers since it is a matter for the taxpayer and HMRC.

If, however, a business were to make both forms of supply it is likely that it would be registered as partially exempt. An exception to this occurs when the amount of exempt input tax a business pays does not exceed a certain level (the de minimis limit). For taxpayers in that position the exempt supplies made are ignored, and the taxpayer is treated as ‘fully taxable’, that is the taxpayer may set off all of his input taxes against his output taxes. The current limit is £7,500 per annum input tax where that does not exceed 50% of total input tax.

18.5 VAT administration

The care and management of VAT is under HMRC, and a person making taxable supplies is required to be registered for VAT at the end of any month:

(a) if the value of the persons’ taxable supplies in the period of one year then ending have exceeded £85,000; or

(b) there are reasonable grounds for believing that the value of the person’s taxable supplies in the period of thirty days then beginning would exceed £85,000 per annum.

The above financial limits are amended periodically and the current figure of £85,000 was effective from 1 April 2017 and will not change for the two year period starting on 1 April 2018.

VAT returns (showing inputs and outputs) are required quarterly. Monthly returns are available for regular repayment traders. HMRC have powers to make a ‘best of judgement’ VAT assessment in the absence of such returns. An appeal against an assessment may be made to an independent VAT tribunal. The procedures for such references are more formal than for IR tax matters dealt with by the General Commissioners, and must be adhered to.

There is a right of further appeal by case stated on a point of law. There is no provision for the Upper Tribunal (Lands Chamber) to hear valuation disputes but it would be possible for the VAT Tribunal to appoint valuer members if required.

HMRC have wide powers of enforcement, including prosecution under criminal or civil law, standard surcharges/penalties for failure to comply and interest charges on unpaid tax.

18.6 Tax point

A tax point occurs for the supply of goods

(a) if the goods are to be removed, at the time of the removal; or

(b) if the goods are not to be removed, at the time when they are made available to the person to whom they are supplied; or

(c) if, before the above time, the person making the supply issues a VAT invoice in respect of it or receives a payment in respect of it, the supply shall, to the extent covered by the invoice or payment, be treated as taking place at the time the invoice is issued or the payment is received.

A tax point for the supply of services shall be treated as taking place at the time when the services are performed.

Regulation 84(1) of the Value Added Tax Regulations 1995 (SI1995 No 2518) states that where an interest in, or right over, land is compulsorily purchased and, at the time determined in accordance with the above provisions (which in terms of compulsory purchase would be the date of entry), the person (the grantor) from whom it is purchased does not know the amount of payment that he is to receive in respect of the purchase then the goods or, as the case may require, services shall be treated as supplied each time the grantor receives any payment for the purchase.

Thus a tax point would arise on the making of an advance payment (in respect of the amount of the advance payment) and a further tax point at the date of final payment (in respect of the amount of the final payment). VAT would be charged at the rate in force at the tax point.

In planning compensation cases the tax point is the date of agreement of the amount of compensation.

18.7 Historical background

VAT was adopted by the European Community (EC) as a standard form of indirect taxation. All member states are required to adopt it and from time to time EC Directives are issued to harmonise the tax system as between these states.

The European Commission considered that the UK rules did not comply with the Sixth Directive in continuing to zero-rate certain supplies of goods and services and brought an action in the European Court. This found against the UK on 21 June 1988. Following the Court’s judgement the Government announced its intention of implementing the ruling in the property and construction sectors and shortly thereafter a Customs and Excise (now HMRC) consultation document was issued.

The effect of the changes was to make VAT payable as from 1 April 1989 on certain non-domestic property transactions and construction work that were previously either exempt or zero-rated.

The proposals put forward after various amendments have now been consolidated in the VAT Act 1994 together with the VAT Regulations 1995.

18.8 Standard rating

The VAT Act 1994 provides for the standard rating of certain supplies of land and buildings. The supplies concerned are:

(a) selling the freehold of any new or uncompleted building (except a house, flat or other qualifying building);

(aa) supply made pursuant to a developmental tenancy, lease or licence (repealed as from 1 March 1997);

(b) selling the freehold of any new or uncompleted civil engineering work;

(c) granting any right to take game or fish;

(d) providing - in a hotel, inn, boarding house or similar establishment - sleeping accommodation or accommodation in rooms provided in conjunction with sleeping accommodation or for the purposes of a supply of catering;

(e) providing holiday accommodation in a house, flat, caravan, houseboat or tent;

(f) providing pitches or other facilities for caravans (other than permanent residential caravans) or tents;

(g) granting vehicle parking facilities, except in conjunction with lettings of domestic accommodation;

(h) granting any right to fell and remove standing timber;

(i) granting facilities for housing or storage of an aircraft or for mooring or storage of a ship or boat;

(j) providing facilities such as a seat, box, or other accommodation at a sports ground, theatre, concert hall or other place of entertainment;

(k) granting facilities for playing any sport or participating in any physical recreation. A series of lets of sports facilities may be exempt in some circumstances;

(l) the grant of any right, including

(i) an equitable right

(ii) a right under an option or right of pre-emption, or

(iii) in relation to land in Scotland, a personal right,

to call for or by granted an interest or right which would fall within any of paragraphs (a) or (b) to (k) above.

18.9 Construction

The cost of construction of most non-domestic buildings is standard-rated. This also applies to associated works, fees and such.

It is particularly to be noted that, apart from the supplies listed in paragraph 18.8 above, the grant of any interest in or right over land is exempt or zero-rated and will thus not give rise to a charge to VAT. There is however an important proviso related to this general exemption and that is where the supplier exercises an election to waive exemption (now termed ‘option to tax’). This is explained in detail at paragraph 18.12 below. The effect of exercising the election to waive exemption is to tax at the standard rate the grant of the interest in land and such but of course it also allows the grantor to recover input tax on the costs incurred in connection with the acquisition and development of that land.

Exemption, option to tax and zero-rating

18.10 General

‘Land’ includes buildings, walls, trees, plants and other structures and natural objects attached to the land so long as they remain attached.

18.11 Exemption

(a) The grant (supply) of any interest in or right over land or of any licence to occupy land is exempt unless falling within one of the specified categories that would be standard-rated (Group 1 of Schedule 9 to the VAT Act 1994). See paragraph 18.8 above.

(b) The supply of an interest in land includes the assignment (in Scotland, the assignation) or grant of a lease or building or of land. A supply of a right over land includes the grant of mineral rights over land and the grant to the owner of neighbouring land of an easement (in Scotland, a servitude) for example the grant of a right of way, light or water and such so as to make the property better or more convenient.

(c) A licence to occupy land may be written or oral. To be within the scope of the exemption it must relate primarily to the occupation of the land rather than to the use of the facilities it may offer. It must give to the person to whom it is granted occupation of a clearly defined site with the right to exclude other people.

(d) The Value Added Tax (Land) Order 1995 (SI 1995 No 282) amended Group 1 of Schedule 9 to the VAT Act 1994 to include assignments, surrenders and reverse surrenders thus making them exempt.

However, all these exempt supplies could be turned into standard-rated supplies by means of the ‘option to tax’ (election to waive exemption).

18.12 Option to tax (election to waive exemption)

Schedule 10 to the VAT Act 1994 authorises an ‘option to tax’ at the standard rate for disposals of interests in buildings and land that would otherwise be exempt under Group I of Schedule 9 to the Act. The purpose of the election is to allow recovery of input tax once the election is made that would otherwise be lost under the partial exemption rules.

Schedule 10 was re-written by the Value Added Tax (Buildings and Land) Order 2008 (SI 2008 No 1146).

An election to tax at the standard rate has no effect in relation to a grant in the following circumstances:

Dwellings designed or adapted, and intended for use, as dwelling (and such)

An option to tax has no effect in relation to any grant in relation to a building or part of a building if the building or part of the building is designed or adapted, and is intended, for use

(a) as a dwelling or number of dwellings, or

(b) solely for a ‘relevant residential purpose’.

Conversion of buildings for use as dwelling (and such)

An option to tax has no effect in relation to any grant made to a person (‘the recipient’) in relation to a building or part of a building if the recipient certifies that the building or part of the building is intended for use

(a) as a dwelling or number of dwellings, or

(b) solely for a ‘relevant residential purpose’

Charities

An option to tax has no effect in relation to any grant made to a person in relation to a building or part of a building intended by the person for use

(a) solely for a ‘relevant charitable purpose’, but

(b) not as an office.

18.13 Zero-rating

Where a supply is zero-rated VAT is charged at 0% (that is no VAT is charged) but the supplier can recover all related input tax from HMRC.

Where a builder owns land and constructs housing or other qualifying buildings, the supply of a new building will be zero-rated provided;

(a) the building is of a type that can be zero-rated (see para 18.14 below);

(b) a certificate from the purchaser is available, where required;

(c) the builder grants a major interest in or in any part of the building or its site;

(d) the builder qualifies as the person constructing the building;

(e) the building is a completely new building.

All of these conditions must be met and the zero-rating will include the land on which the construction takes place together with a reasonable plot of land surrounding it.

Land would not be regarded as the site of a building unless a building were clearly under construction on the land, that is it had progressed beyond the foundation stage. If there were a grant of a major interest in a site on which no construction work beyond the foundation stage had been undertaken, then the supply would be exempt unless exemption had been waived.

18.14 New buildings that may be zero-rated

The following buildings may be zero-rated:

(a) a dwelling, or a group of dwellings (such as a block of flats) - except a dwelling which cannot be lawfully occupied throughout the whole year by the individual to whom the grant is made, for example time share accommodation and holiday and other accommodation with restrictions on its use;

(b) a residential building or a residential part of a building which has been certified will be used as a children’s home; a home for old or disabled persons at which care is provided; a home for the rehabilitation of persons who suffer from or have suffered from alcohol or drug dependency or mental disorder; a hospice; living accommodation for students or school children; living accommodation for members of the armed forces; living accommodation for members of religious communities or any communal living accommodation which at least 90% of the residents use as their sole or main residence; but not a hospital, prison or other penal institution, or an hotel, inn or similar establishment;

(c) a building or part of a building which has been certified will be used by a charity for a non-business purpose;

(d) a new garage sold with a dwelling if both were built at the same time.

18.15 Practice implications - valuations for purchase by agreement or by compulsory purchase

It is essential at the very outset of any case that the valuer concerned ascertains, from both parties to any transaction, whether or not they are registered for VAT and the status for VAT purposes of the interest involved, that is, is this an exempt or standard rated supply?

Failure to observe this requirement can have serious consequences both for the valuer and the client (see paragraph 18.16 below).

18.16 Acquisitions and disposals for capital consideration

When acting on behalf of a client body for the acquisition or disposal of property or land it will now be essential to ascertain the VAT status of both parties to the transaction and the VAT status of the subject of the transaction.

The importance of this lies in the view held by HMRC that where the transaction is one that would attract VAT it is to be assumed that the consideration paid is inclusive of VAT unless specifically stated to be exclusive. Thus where VAT is payable (whether or not the parties were aware of the fact) and, acting for a client body, the valuer has negotiated a disposal at say £200,000, HMRC will expect the VAT element (£33,333) to be remitted to them as output tax. This could result not only in the client’s receiving a lot less consideration than anticipated from the disposal but also possibly a substantial fine for failing to disclose the receipt of the output tax.

Thus valuers must ensure that enquiries are made at the outset of any case involving interests in land, to discover the status for VAT purposes of both the interest in the property and the parties involved. In this connection an opening letter in relation to the acquisition of a non-residential property should ask for the following information:

(a) Please confirm whether or not you/your client are registered for VAT purposes, and indicate whether you/your client are treated as being fully taxable or partially exempt.

(b) Please also confirm whether the supply of the interest in question is to be treated as an exempt supply or whether the option to tax has already been exercised, or will be exercised, in respect of this interest.

If the valuer were unable to get written confirmation to the above queries it would be necessary to write explaining that for the purposes of negotiations it was intended to proceed on the basis that any agreed figure would be treated as being inclusive of VAT if it subsequently transpired that VAT were payable on the transaction.

Similarly any offer letter or report must state that the consideration is either exclusive of VAT or, where inclusive, stipulate the amount of VAT applicable to the transaction.

Additionally where due to exemption VAT is not payable, any offer letter or report must include a statement or side heading using the following or similar form of words:

‘The stated opinion of value is based on the understanding that this transaction is exempt from VAT. However should this assumption be, or become, incorrect then the stated opinion of value should be treated as an inclusive of VAT figure’. (In other words once you have agreed the value of the supply at full market value it is not correct subsequently to agree to the addition of VAT - the market value is in reality an inclusive figure.)

18.17 Compensation for compulsory purchase

(a) Land and buildings

Compensation for the compulsory purchase of land and of buildings will be regarded as the consideration for a supply of goods and the incidence of VAT on the supply will follow exactly the same rules as for any other supply, that is, VAT will be payable on those supplies normally subject to standard rating and those where the right to exemption has been waived.

(b) Disturbance items

All disturbance items are considered by HMRC to be part of the consideration for the supply. Thus treatment of disturbance compensation will be as follows:

(i) Where the claimant is not registered for VAT and the supply of land/buildings is exempt, VAT on any disturbance items should be paid as part of the compensation since the claimant will not be able to reclaim the VAT from HMRC.

(ii) Where the claimant is fully registered for VAT and the supply of land/buildings is exempt, VAT on any disturbance items should not be paid as part of the compensation unless the transaction would cause the claimant’s total input VAT to exceed the de minimis limits (see paragraph 18.4) because the claimant would be able to reclaim the VAT on the disturbance items from HMRC as input tax relating to the supply of the land/buildings to the acquiring authority. If the transaction caused the claimant’s total input VAT to exceed the de minimis limits (total input VAT relating to exempt supplies exceeds £7,500 per annum) the claimant would be unable to reclaim the VAT on the disturbance items from HMRC, and the amount should therefore be reimbursed by the acquiring authority.

(iii) Where the claimant is fully registered for VAT and the supply of land/buildings is standard or zero rated, VAT on any disturbance items should not be paid as part of the compensation because the claimant would be able to reclaim the VAT from HMRC as input tax relating to the supply of the land/buildings to the acquiring authority. However, the net amount of any disturbance items should be added to the compensation for land/buildings and VAT added to the total at the appropriate rate (20% or 0%) because compensation for disturbance is deemed to comprise part of the payment for the land taken

(c) Severance and injurious affection

Payments made in respect of severance and injurious affection are not considered to be a supply within the scope of VAT. This is because such payments are in respect of retained land and NOT in connection with the land being supplied ie there is no supply of goods being made in respect of the retained land. Thus VAT will NOT be payable on those heads of claim. It is therefore important that these payments are shown separately (when VAT is payable on the other heads of claim) in both the final report and when dealing with advance payments. Compensation paid in respect of claims under Part 1 Land Compensation Act 1973 and section 10 Compulsory Purchase Act 1965 will thus be outside the scope of VAT.

18.18 VAT status of parties

In the valuation of land and buildings in compulsory purchase cases, the VAT status of the hypothetical purchaser or market for the property may affect its value. For example, if the most likely hypothetical purchaser were a VAT averse party, the value of the property to be acquired might be adversely affected if subject to VAT.

So that the valuer may be fully apprised of the VAT position of the claimant and to enable the appropriate recommendation in respect of VAT to be made in the report of agreed terms to the acquiring authority, it is recommended that the questionnaire at Appendix 18/1 be sent to the claimant in every case where land is to be acquired.

18.19 Interest on compensation

Where interest is payable on compensation monies, VAT (if applicable) is only to be applied to the agreed value of the property being acquired and not to any sum in respect of interest.

18.20 Advance payments

Where advance payments are made in respect of land and buildings on which entry has been taken the payment of such advances is taken to be a tax point for interim payments. VAT should be added to the advance payment as and where applicable.

18.21 Surveyors’ fees

Where surveyors’ fees are being paid by the acquiring authority it is necessary carefully to consider the circumstances of both the claimant and the nature of the supply in order to determine the correct incidence of VAT. In this regard it should be noted that there are three possible scenarios when considering the VAT position of a transaction:

(i) Where the claimant is not registered for VAT and the supply of land/buildings is exempt, VAT on surveyors’ fees should be paid as part of the compensation since the claimant will not be able to reclaim the VAT from HMRC.

(ii) Where the claimant is fully registered for VAT and the supply of land/buildings is exempt, VAT on surveyors’ fees should not be paid as part of the compensation because the claimant would normally recover the VAT from HMRC through his periodic input return. If exceptionally the transaction caused the claimant’s total input VAT to exceed the de minimis limits (total input VAT relating to exempt supplies more than £625 per month on average or £7,500 per annum) and the claimant thus became partially exempt, he would no longer be able to reclaim the VAT on the surveyors’ fees from HMRC and it should therefore be reimbursed by the acquiring authority as irrecoverable expenditure incurred by the claimant as a consequence of the compulsory acquisition.

(iii) Where the claimant is fully registered for VAT and the supply of land/buildings is standard or zero rated, VAT on any surveyors’ fees should not be paid as part of the compensation because the claimant would be able to reclaim the VAT from HMRC as input tax relating to the supply of the land/buildings to the acquiring authority. However, the net amount of the surveyors’ fees should be added to the compensation for land/buildings and VAT added to the total at the appropriate rate (20% or 0%) because compensation for surveyors’ fees is deemed to comprise part of the payment for the land taken. The VAT in this case would comprise the claimant’s output VAT on the value of the goods supplied to the acquiring authority.

The table at Appendix 5/3 shows in more detail the circumstances in which VAT should be reimbursed on surveyors’ fees both when paid to the claimant or direct to the surveyor.

Surveyors’ fees (where an ad valorem basis of calculation is used) are to be based on the total compensation (for land/buildings/disturbance and such) including any VAT payable thereon.

The compensating authority will always reimburse VAT on surveyors’ fees (where the surveyor is registered for VAT) relating to compensation for severance and injurious affection (for example Part I claims or claims under section 10 Compulsory Purchase Act 1965) because such compensation falls outside the scope of VAT, there being no supply of goods (land) involved.

18.22 Basis for levying VAT

As has already been stated VAT is a tax on supplies of goods and services by a taxable person in the course or furtherance of a business. Thus in order for VAT to be applicable there must be

(a) a supply

(b) a taxable person and

(c) the supply must be made in the course or furtherance of a business.

Unless these three elements were present there would be no charge to VAT. Furthermore no charge arises for either exempt or zero-rated supplies. Therefore in the following Paragraphs where applicable the advice given presumes that the elements for taxability exist and that the option to tax has been exercised by the vendor/landlord.

18.23 Apportionments

Apportionments will be required in the following instances:

(a) Where part of a building is exempt or zero-rated and part is not (for example a shop with a flat over it) the supply must be apportioned between the standard-rated element for the commercial premises and the exempt element for the residential accommodation.

(b) Similarly where exemption has been waived on an agricultural holding any disposal of that holding will need to be apportioned between the dwelling house element and the remainder (exemption cannot be waived on a dwelling).

(c) Where gaming or sporting rights form part of a leasehold disposal of otherwise exempt land then these too will require apportioning out as standard rated elements. (Provided the rental value of sporting rights exceeds 10% of total rent payable.)

There is no statutory method of apportionment provided in the legislation and the most likely method in practice will be the approach in Salts v Battersby [1916] 2 KB 155 (that is, apportionment to have regard to the relative values of the parts). In exceptional circumstances where some other basis of apportionment is being considered this should first be notified to the PS Professional Guidance team.

18.24 Dual market

Most occupiers of non-domestic property are VAT registered trading organisations and the imposition of VAT on their rent or purchase consideration will have little effect as it will be fully refundable as input tax. However, certain major property occupiers such as Banks, Building Societies and Insurance Companies mainly make exempt supplies and as a result these occupiers are unable to reclaim all the VAT paid on rent on any ‘new’ building or on any other building where the landlord has ‘elected to tax’. Where VAT is charged on rents in such circumstances it is possible that the rent bid by such institutions will be lower than might otherwise be expected in order to reflect this.

The same reasoning will also apply to the purchase of a taxable property where the purchaser is not registered for VAT resulting in a less than full consideration being paid.

The potential for this to happen has led to the suggestion that a dual market will be created for land and property. It remains to be seen to what extent any such trends would emerge but the most likely effect would be on those markets that are dominated by VAT averse occupiers and owners (for example City of London offices).

18.25 Comparable evidence

It is important for valuers to be aware that a potential dichotomy in the property market could exist to some extent and to consider the status of any comparable evidence on which they intend to rely, for example does the consideration/rental indicated on a comparable transaction include or exclude an element in respect of VAT? If exclusive, is VAT nonetheless payable in addition or is this an exempt transaction? This will be of immediate practical relevance in ascertaining the level of notional rent for owner-occupier doctors under the Doctors Rent and Rates Scheme - see paragraph 18.26 below.

The market in domestic property is unlikely to be affected as sales of new properties by builders are zero-rated and the second hand market is predominantly outside the legislation (the purchasers are predominantly individuals and the purchase is not made in the course or furtherance of a business).

There may be some effect on the value of properties for refurbishment where standard-rated construction costs may not be recoverable against exempt supplies.

Whilst it will not be possible to ascertain the true circumstances for all transactions, information on SDLT forms and on rent returns should be reasonably clear as to whether VAT has been charged. Where a form or return is silent on the issue and simply quotes a figure for consideration (for example ‘£450,000’) it should generally be assumed that such a figure is exclusive of any VAT that may be payable unless there are good reasons to suspect otherwise. Enquiries should only be made of the purchaser’s/lessee’s solicitors in exceptional cases when it is particularly important to clarify the facts.

18.26 Leases

A similar situation to that at paragraph 18.15 above arises with leases where HMRC will deem the rent payable under a lease to be inclusive of VAT unless specifically excluded. Thus when dealing with a lease of any non-domestic building it is essential to ascertain whether the rent is stated to be inclusive or exclusive of VAT.

Again it is important that the VAT situation be specifically referred to in any letter proposing terms of settlement or in any report. Where advice is sought concerning the terms of a new lease the situation can be covered by introducing a clause making the rent payable exclusive of all current or future tax liabilities.

18.27 Refund of tax to Local Authorities and other bodies

Section 33 VAT Act 1994 provides for the refund of VAT incurred by certain bodies in respect of supplies made to them which might not otherwise be recoverable. The supplies must relate to the non-business activities of those bodies. The bodies concerned include local authorities, water authorities, development corporations, police authorities, the BBC and other specified bodies. For these bodies the incidence of VAT should have a broadly neutral effect.

Central government departments cannot normally recover VAT and other public bodies are treated broadly in the same way as any other organisation - their ability to recover input tax will depend on their being registered and making taxable supplies in the course of business.

18.28 Doctors rent and rates scheme

Doctors are VAT averse and in most cases will be unable to recover any input tax paid by them whether by way of rent, purchase consideration or cost of construction. The Doctors Rent and Rates Scheme provides for the reimbursement of VAT properly payable but valuers will need to have regard to market conditions and ensure that any rent agreed by the doctors reflects their VAT averse status, to the extent that the market would do so, if Clinical Commissioning Groups’ or NHS England’s budgets are not to be subjected to an unnecessary burden. However, since in the current market most lease rents of practice premises are subject to VAT, it is unlikely that the valuer would be able to distinguish a ‘dual market’ from the available evidence.

Notional rents payable to owner-occupier doctors should be at levels exclusive of VAT.

18.29 Sporting rights

(a) The granting of any right to take game or fish is a standard rated supply (see paragraph 18.8c above) and VAT will be charged on sporting rights sold or leased separately from the land. Licences to shoot or fish are also liable to VAT.

(b) Freehold sales of land that include valuable sporting rights will not be subject to VAT unless the vendor has previously exercised an option to waive exemption on the land.

(c) Compensation payable in respect of loss of sporting value on retained land is not subject to VAT as there has been no supply made (that is the sporting rights on retained land are left with the claimant and the compensation is paid to reflect their diminished value).

(d) However where land including ‘valuable’ sporting rights is leased, rather than sold freehold, VAT will be charged on the portion of the rent attributable to the sporting rights. (HMRC have agreed that ‘valuable’ sporting rights are those where the rental value exceeds 10 per cent of the total rent charged under the lease.)

18.30 Further information

A more detailed exposition of the application of VAT to land and buildings can be found in HMRC’s VAT Notices. These can be found at:

https://www.gov.uk/government/collections/vat-notices-numerical-order

The more important ones connected with land and property are:

Notice 706: Partial exemption

Notice 708: Buildings and construction

Notice 742: Land and property

Notice 742A: Opting to tax land and buildings