On 30 November 2021 the UK government published a summary of responses to the consultation on aspects of the VAT exemption for land and the option to tax.

A consultation paper in May 2021, asked for evidence to assess potential options for simplification of the VAT exemption for land and property. Stakeholders were asked for their comments on the current VAT rules on land and property and on the potential options for simplification of the rules.

Responses

Respondents commented on the anti-avoidance rules for the option to tax, and also referred to difficulties arising from situations where there is no direct record of an option to tax. Views were also expressed on short-term arrangements, such as trading concessions, serviced offices and conference facilities. In these situations, it can be unclear if the supply should be treated as a property letting or as the provision of facilities. Another cause of difficulty for respondents was the VAT treatment of mixed-use developments that include both commercial and residential areas, an example being student accommodation with ground floor retail.

Respondents were not in favour of making supplies of land and property subject to VAT with specified exceptions. They noted that this could create significant additional costs for businesses, with irrecoverable VAT and new compliance costs. This would lose the flexibility provided by current legislation; and could be detrimental to businesses.

Businesses considered HMRC’s current guidance to be inadequate and inconsistent, mentioning the use of unsatisfactory examples in the guidance. Respondents also gave their views on problems arising from the interaction of stamp duty land tax (SDLT) and VAT.

Improved guidance

The respondents considered that uncertainty and delay could be reduced if better guidance was available on issues such as dilapidations, overages, call options and rights of light. HMRC has established a working group with members of the Land and Property Liaison Group to produce guidance for HMRC compliance officers. The updated guidance on dilapidation payments will be published in early 2022.

The joint working group is developing guidance on overages. There is already some guidance available on call options but clarification on some issues will be produced in the new year. Also, HMRC intends to engage with the working group on rights of light once sufficient progress has been made on the other areas.

Further consultation

The government is looking at the possibility of establishing a workable definition of “short term” or “minor” interests and making these supplies subject to VAT. Businesses would be consulted on any proposals.

The government also intends to further explore the possibility of making most supplies of land subject to VAT with just a limited number of exceptions. The government wants to understand the challenges and any unintended consequences of this change before arriving at a decision.

Other issues that could be followed up are the request for HMRC to establish a more comprehensive register of existing options to tax; and a review of the anti-avoidance rules relating to the option to tax. Consultations with businesses will commence in early 2022.