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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Supply: time of supply

Normal rules

You can find information on the time of supply rules in Notice 700 The VAT guide and in VATTOS - Time of supply.

Special rules for sales of freehold land and buildings with indeterminable consideration

When the option to tax was introduced on 1 August 1989 it was intended that landlords who had granted leases prior to this date would be able to opt to tax and charge VAT on subsequent rentals.

Subsequently concerns were raised that the legislation might not have this effect. To put the matter beyond doubt, section 96(10A) of the VAT Act 1994 was inserted by the Finance Act 1997.

The measure provides that where the grant of an interest in land gives rise to a series of VAT supplies the liability is determined by the circumstances at the time of each supply rather than the time of the grant.

a) Section 96(10A)


(a) the grant of any interest, right, licence or facilities gives rise for the purposes of this Act to supplies made at different times after the making of the grant, and

(b) a question whether any of those supplies is zero-rated or exempt falls to be determined according to whether or not the grant is a grant of a description specified in Schedule 8 or 9 or any of paragraphs 5 to 11 of Schedule 10,

that question shall be determined according to whether the description is applicable as at the time of supply, rather than by reference to the time of the grant.

Although the measure was intended to apply to leases it was drafted widely enough to apply to freeholds as well. The unintended consequence was that it opened the opportunity for avoidance on the sale of freeholds of new commercial properties.

b) Avoidance - regulation 84(2) schemes

The sale of the freehold of a newly constructed commercial building is standard-rated during the building’s first three years. After three years any subsequent sale of the freehold becomes exempt unless the seller waives exemption (opts to tax). Under normal rules VAT is due on the date of legal completion of the grant of the freehold of a new commercial building.

Regulation 84(2) provides a mechanism to delay the payment of VAT where part of the price is uncertain. For example, a developer of an office building may receive the bulk of the payment on legal completion but be entitled to a deferred payment based upon the level of rental income achieved by the purchaser. The amount of this deferred payment is not known at legal completion. Regulation 84(2) allows the developer to delay accounting for the VAT on the deferred payment until receipt.

Without the regulation the developer would be required to estimate the eventual price and account for VAT on the total up-front, adjusting later when the payment was received.

Of itself the regulation would only have been useful as a mechanism to delay accounting for tax on a freehold sale. A partly exempt trader could have arranged for an associated company to construct a property for them, and then to sell the freehold to them (having recovered the input tax); the sale being arranged so that the eventual consideration was uncertain and paid over many years, thus delaying irrecoverable VAT on the sale.

However section 96(10A) confirmed that the question of the liability of payments received should be determined by the circumstances at the time of the supply (ie time of receipt) and not the time of the original grant. Thus when the liability of the freehold changed from taxable to exempt after three years the liability of any future supplies arising from that original grant also became exempt. Avoiders arranged for most of the consideration to be exempt, despite the seller having recovered VAT on construction as attributable to the earlier (small) taxable payments.

Initially HMRC blocked the scheme above by complex amendments to Regulation 84, with effect from 28 November 2002. These were simplified at Budget 2003 when section 96(10B) (see below) was introduced. There are more details about Regulation 84(2) and these amendments in VATTOS - Time of supply.

c) Section 96(10B)

Section 96 was amended in Finance Act 2003. With effect from Budget day (9 April 2003) subsection 96(10B) was introduced. It applies to any supplies arising from the prior grant of a fee simple made on or after 9 April 2003.

Section 96(10B)

Notwithstanding subsection (10A) above -

(a) Item 1 of Group 1 of Schedule 9 does not make exempt any supply that arises for the purposes of this Act from the prior grant of a fee simple falling within paragraph (a) of that item; and

(b) that paragraph does not prevent the exemption of a supply that arises for the purposes of this Act from the prior grant of a fee simple not falling within that paragraph.

The effect of subsection 96(10B)(a) is that section 96(10A) no longer applies to the compulsorily standard-rated grant of the freehold of a new commercial building. The liability of any deferred payments is based on the circumstances at the time of the grant of the freehold, not at the time of payment. Hence deferred uncertain payments for the freehold of a new commercial building will not become exempt after three years but will remain standard-rated.

Subsection 96(10B)(b) provides protection against the following variation on the typical avoidance scheme:

  • A sale of land is made before construction starts, the total consideration for which is not determinable at the time of the sale. Payments made at this point will be exempt.
  • Payments are then made whilst the building is in the course of construction or “new”. These payments will be taxable since the land is within Schedule 9, Group 1, item 1(a) at the payment tax point and input tax on the construction costs will therefore be deductible.
  • Further payments are made after the building ceases to be new, so the payments are again exempt; in a scheme these would be the bulk of the payments.

To deal with this situation subsection 96(10B)(b) provides that where the original grant of the land is exempt, Item 1(a) of Group 1, Schedule 9 does not apply to any subsequent supply arising from that grant. The effect is that the deferred payments made while the building is new will be exempt rather than taxable.