VATLP02930 - Supply: Overage payments: VAT treatment of overage payments
The VAT liability of an overage payment will normally follow the VAT liability of the sale of the land.
However, in some situations the overage payment can have a different VAT liability from that of the original supply of the property. This is because of the interaction between the time of supply rules and the provisions of sections 96(10A) and 96(10B) VAT Act 1994.
In relation to freehold sales, the general effect of Regulation 84(2) of the VAT Regulations 1995 is that, to the extent the consideration is not determinable at the normal time of supply, the land shall be treated as separately and successively supplied at the time further consideration is received or a VAT invoice is issued (whichever is earlier).
In such cases, the time of supply in relation to the overage payment will be later than the time of supply of the original grant. When considering the VAT liability of an overage payment the general rule, set out in section 96(10A) VAT Act 1994, is that you consider the description of the land at the time of supply applicable to the overage payment, not the time of supply of the initial sale of the land. However, as set out in VATLP02950, that rule does not apply in relation to grants falling within paragraph (a) of Item 1, Group 1, Schedule 9, VAT Act 1994 – which includes freehold sales of ‘new’ commercial buildings; with ‘new’ in this context meaning less than three years from completion, and ‘commercial’ meaning any building that is not designed as a dwelling or number of dwellings nor intended for use solely for a relevant residential or relevant charitable purpose. For the meaning of these terms, see Buildings and construction (VATNotice 708).
Please see VATLP02800 for a detailed explanation of section 96(10A) and section 96(10B) VAT Act 1994.