VATLP02940 - Supply: Overage payments: Overage payments where an option to tax is made after the initial grant
Where an option to tax is made after the property has been sold to the buyer, any subsequent overage payment may be liable to the standard rate of VAT as a result of Paragraph 31, Schedule 10, VAT Act 1994 (unless the option to tax has been disapplied).
Exclusion from, or disapplication of, the option to tax - overage payments
An option to tax will not result in the payment of the overage being standard-rated if the option has been excluded or disapplied. For example, 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
In a situation where the overage payment is made after the dwellings are constructed on the land, and the original grant was taxable by virtue of the option to tax, the option can be excluded in relation to the overage payment, under paragraph 5, Schedule 10, VAT Act 1994.