Should the VAT land exemption be simplified?
By Susan Cattell, Head of Tax Technical Policy
2 September 2021
ICAS responded to the recent call for evidence on simplifying the VAT land exemption; the major reforms suggested would not produce any overall significant benefit but there is scope for improvements to make the regime run more smoothly.
The VAT land exemption
The ICAS response to the call for evidence concluded that none of the suggested major reforms would improve the position in the majority of cases. Most of the proposals involved the removal of flexibility and a high likelihood of the creation of a different set of complications, boundary issues and difficulties (in some cases for different taxpayers) without any significant overall benefit.
Revisiting the Office of Tax Simplification review
It is worth noting that in its 2017 review of VAT, the Office of Tax Simplification (OTS) considered – and rejected – three possible options for reforming the VAT land exemption:
- a) Removing the ability to opt and making all relevant transactions exempt.
- b) Removing the option to tax and make all land and property taxable at a reduced rate.
- c) Making all commercial land and property taxable at the standard rate with an option to exempt.
The current call for evidence asked for views on these options. ICAS agreed with the OTS reasons for rejecting a) and b). Removing the ability to opt would also create uncertainty in some cases. Option c) does not appear to be a simplification and would create similar issues to those already arising under the current regime. As the OTS pointed out, it would also require considerable administrative effort and cost for both HMRC and businesses to unpick the existing system.
New suggestions for reform
The call for evidence put forward three new suggestions for reform – all of which the ICAS response rejected:
Make all minor and short-term interests in land and property subject to VAT
No definition of ‘minor’ or ‘short term’ was proposed but it seems likely that any definition would create similar borderline issues to those the proposal is trying to address. Depending on the definition chosen there could also be issues around, for example, break clauses in leases, renewals of leases and assignments part way through the term of a lease. Similarly, there could be significant transitional issues depending on how any new rules would apply to existing arrangements.
The call for evidence suggested that issues with the current rules include differing interpretations by businesses and frequent litigation – leading to unclear borderlines. Rather than introducing a new set of rules, where there is clearly potential for similar problems to arise, it would be preferable to consider whether clarification of existing legislation and improved HMRC guidance might produce better results.
Make supplies of land and property subject to VAT apart from certain specified exceptions
ICAS could not see that this option would be beneficial. It removes the flexibility provided by the current regime and (depending on the scope of the exceptions) would impose additional VAT and SDLT/LBTT/LTT costs on many, with likely adverse consequences.
It appears that the exceptions would relate to residential accommodation and charitable buildings. If these were extended, it would undermine the suggested benefits and increase complexity. However, restricting the exceptions would involve adverse consequences for many who would prefer to be making exempt supplies. There would also be significant transitional issues.
Link the VAT liability of interests in land to those recorded in Land Registers in England, Scotland, Wales and Northern Ireland
This would also remove the current flexibility. It might in theory provide more certainty but as noted in the call for evidence there would still have to be exemptions, so in practice it is unclear that certainty would be achieved.
Other obstacles include: the land registry records legal title rather than beneficial ownership and the law relating to leases is not the same in Scotland as in England and Wales. Linking the tax treatment to registration could distort behaviour. It is also unclear how any transitional issues arising from this approach could easily be dealt with.
Improvements which would be useful
ICAS set out a long list of suggestions for improvements to the existing regime to make it run more smoothly, whilst retaining the flexibility it provides. Full details can be found in the ICAS response to the call for evidence but the headline suggestions included:
- Introduction of a digital system for options and creation of a database of options: this would address many of the practical issues arising from the process for opting and ascertaining whether an option exists.
- Revocation of options to tax should be available after 10 years rather than 20.
- Capital goods scheme: increase in the threshold (with indexing or regular reviews going forward) and changes to the rules for adjustments to minimise administrative burdens.
- VAT rates – building renovations: amending the regime so that it does not disincentivise the renovation and repair of existing buildings. Demolition and replacement of buildings generates carbon emissions, so this would support the Government’s plan to tackle climate change.
- Pre-registration input VAT: align the rules for services with those for goods (ie recovery if incurred within four years rather than six months).
- Improve HMRC guidance and the process for obtaining rulings: there will always be borderline issues and cases arising from novel circumstances where the correct VAT treatment is unclear. Improving HMRC guidance and the rulings process would address many of these.
ICAS would like your views
ICAS responds to many tax-related consultations, calls for evidence and discussion documents issued by HMRC and H M Treasury. We welcome input, which we take into account when preparing responses.
Please send us your input by emailing tax@icas.com.