VATLP02950 - Supply: Overage payments: New commercial buildings - overage payments

For the purposes of this section a commercial building is any building that is not designed as a dwelling or number of dwellings nor intended for use solely for relevant residential or relevant charitable purposes. For the meaning of these terms, see Buildings and construction (VAT Notice 708)

The VAT treatment of overage payments in relation to a freehold grant of a new or incomplete commercial building is set out at section 96(10B) VAT Act 1994 and can be summarised as follows: 

  • Where there is a grant of a freehold interest in a new (or incomplete) commercial building, the overage will always be taxable at the standard rate – it does not become exempt simply because three years or more have elapsed since the building was completed. This will remain the position if the overage falls due after the designation ‘new’ has expired after 3 years.  
  • Where there has been a freehold sale of bare unopted land subject to an overage obligation, the liability of the overage payment will remain exempt even if a new commercial building is constructed on the site before the overage is paid. 

This means that the VAT liability of the overage is determined by reference to the description of the land at the time that the original sale of the land takes place. 

The rules about overage payments in relation to new commercial buildings are subject to anti-avoidance provisions, which are set out in VATTOS9385.