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HMRC internal manual

VAT Time of supply

HM Revenue & Customs
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Tax points for specific types of supply: land and property: contingent or indeterminable payments




Regulation 84(2) of the VAT Regulations 1995 (see VATTOS2330) applies to supplies of freehold land where

• the final purchase price is contingent on some future event, or

• where calculation of what will be the final price is subject to other factors.

For example, the vendor may be entitled to receive a further payment only in the event of the purchaser later obtaining planning permission. Alternatively, it may be that further consideration will fall due but the precise amount will be dependent, for example, on the degree of profit from future development of the land or may be linked to interest rates over the period until payment falls due. In these circumstances the normal tax point rules apply so far as possible. Under regulation 84(2), the tax point for any contingent or indeterminable element of the purchase price (but only that element) may be deferred to the receipt of payment or the issue of a VAT invoice, which ever is the earlier.

Position to 28 November 2002

Until 28 November 2002 regulation 84(2) applied to all supplies involving freehold land for which part of the consideration was not determined at the time the land was transferred. But it was being exploited for avoidance purposes and this led to an amendment to restrict its use in certain circumstances.

Types of avoidance

In a typical example of an avoidance scheme making use of regulation 84(2), a partly-exempt business arranged for a subsidiary to buy land, construct a building and deduct the input tax. The subsidiary then sold the freehold to the parent company for aconsideration which was deliberately made uncertain, for instance, by linking it to future interest rate levels. The subsidiary made a small charge during the three years that the building remained standard- rated. The bulk of the value was paid by the parent company after the building was three years old, when the supplies by the subsidiary were exempt (because of the effect of VAT Act 1994 s96(10A) – you can find more about this in the manual covering land and property). As a result, full input tax was often deducted (though this was subject to partial exemption restriction), and only minimal output tax paid, on abuilding which would be used mainly for exempt purposes.

Position from 28 November 2002 to 9 April 2003

With effect from 28 November 2002, regulation 84 was amended by the Value Added Tax (Amendment) (No 3) Regulations 2002 (SI 2918/2002). The amendment applied until 9 April2003 where the land in question included a new or partly constructed commercial building or civil engineering work, or if the seller intended to construct a new commercial building or civil engineering work on the land after the sale. It did not apply to dwellings, buildings used for a relevant residential purpose or a relevant charitable purpose, or land sold to a purchaser for the purchaser to develop. The changes had the following effects

  • avoiders could no longer use regulation 84(2) at all because they were caught by an anti-avoidance test the same as the one for the option to tax legislation, except that the land and buildings did not have to be a capital item within the Capital Goods Scheme, and
  • to use regulation 84(2), any other seller was required to opt to tax the building, which meant that deferred payments would be standard-rated including those arising after the building was three years old.

The changes applied to grants or assignments of freeholds that took place on or after 28 November 2002 and before 10 April 2003. Supplies made after 28 November 2002 which arose from grants made before that date were not affected by the changes.

Definition of seller

For this purpose, the seller included anyone that the seller expected to acquire theright to receive the uncertain consideration. This prevented the new measures being avoided by sellers transferring their rights under the sale agreement to another person who then constructed the building and claimed input tax. This extended definition of the seller only applied to the 2002 version.

Position from 10 April 2003

Section 96(10B) was added to the VAT Act 1994 from 9 April 2003. It dis-applies section96(10A) where there is a standard rated supply of the freehold of a new commercial building. The effect is that where further tax points for that supply occur three or more years later they attract the same standard-rated liability that applied at the time of thegrant of the freehold, rather than being exempt as they would be if section 96(10A)applied. This neutralises one of the major elements of the avoidance scheme described above. You can find more about section 96(10B) in the manual covering land and property.

The need for anti-avoidance provisions governing the operation of regulation 84(2) itself was therefore greatly reduced. Consequently, the Value Added Tax (Amendment) (No 2) Regulations 2003 (SI 1069/2003) replaced regulation 84(3) to (9) with regulation 84(3) to(5). The role of these provisions is now limited to preventing regulation 84(2) being used as means of deferring payment of VAT over an extended period.

It does this by denying use of regulation 84(2) in cases where

  • there is a standard-rated supply of freehold land including a new or incomplete commercial building or civil engineering work
  • the land is to be occupied either by the person granting the freehold, or those financing the grantor’s development or anybody connected with them, and
  • within 10 years of completion of the building work the building will be used for the purposes of making exempt supplies or for non-business purposes.

As with the 2002 changes, the test is essentially that used for the option to tax anti-avoidance measures, and draws on definitions used for that purpose.

Application outside England and Wales

Both regulation 84(2) and the anti-avoidance measures described above apply to the Scottish and Northern Irish equivalents of a freehold sale.