This document provides a summary of several case studies related to VAT and property: 1) A company that purchased a property, claimed VAT on costs, then de-registered without opting to tax. On sale after de-registration, it had to repay VAT claimed. Opting to tax would have avoided this. 2) A developer purchased a pub with intent to sell to a housing association. The association issued a certificate preventing VAT recovery. Options discussed to avoid this included selling to a developer or "golden bricking" the property. 3) A developer who converted a pub into flats and houses for sale but then rented them out faced capital goods scheme adjustments each year. Options presented to avoid this included transferring

1. VAT AND PROPERTY – SOME
CASE STUDIES
Clifton Ingram LLP
15 May 2014

2. VAT AND PROPERTY – SOME
CASE STUDIES
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presentation given on 15 May 2014. No action should
be taken on the basis of information contained in these
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Copyright 2014, Terry Dockley & Co Limited

3. CASE STUDIES – ISSUES
ADDRESSED
• When does a purchaser need to opt to tax?
• How and when can the capital goods scheme apply?
• What happens on de-registration?
• What sort of buyers can stop a vendor from applying
an option to tax?
• How the Golden Brick works
• Building conversions – what VAT is incurred and can it
be recovered?
• How does the option to tax interact with the TOGC
rules?
• Can you back date an option to tax?
• What are the proper limits to TOGC treatment?

4. CASE STUDY 1
• Sale of industrial unit by
engineering company (“A”)
in March 2012 for £350k
• Bought in June 2008 for
£300k plus VAT
• VAT of £52,500 recovered
by A
• A stopped trading and de-
registered in June 2011
when property still worth
£300k
• Administrator no knowledge
of whether A had opted to
tax

5. WHEN WOULD YOU OPT TO
TAX?
• You can only recover VAT on costs
incurred in making taxable supplies
• If you purchase a commercial building as
an investment and the vendor has opted to
tax, you will usually want to as well
• If you purchase for use in a taxable trade,
you can recover the VAT without opting to
tax
• What about on sale?

6. CAPITAL GOODS SCHEME
• Land and buildings
• Specified categories of expenditure
• Costing £250k or more plus VAT
• Ten-year adjustment period
• Tracks changes in use
(taxable/exempt/non-business)
• Sales

7. CASE STUDY 1– DE-REGISTRATION
• Deemed supply on de-registration
• No option to tax
• So in this case deemed supply was
exempt and 70% of VAT initially recovered
repayable to HMRC on final return
(£36,750)
• If they had opted to tax, then deemed
taxable supply and output tax due on net
realisable value (£60k); no adjustment

8. CASE STUDY 1 - ACTUAL
SALE
• As no option to tax, no further VAT
consequences
• If they had then opted to tax:
– need to re-register and account for VAT on
actual sale price (£70k)
– can claim VAT on de-registration of £60k as
input tax

9. SOME BUYERS WHO CAN
THWART AN OPTION TO TAX
Type of building Certificate?
• Dwellings • None, but the vendor should keep
evidence of buyer’s expressed
intentions
• Relevant residential • As above
• Buildings to be converted
into dwellings
• 1614D
• Land sold to a housing
association to build
dwellings on (after any
necessary demolition work)
• 1614G (case study 2)
• Where anti-avoidance
applies
• Case study available

10. CASE STUDY 2
• 2011 entrepreneur buys
pub for £500k
• 40% of building is a flat
so VAT only paid on 60%
of price (£60k) (using
rateable values)
• No intention to trade but
to do up pub and sell on
with same split
• 2012 selling to Housing
Association with planning
for demolition and rebuild
as dwellings
• Purchaser issues 1614G

11. VAT CONSEQUENCES OF
1614G?
• Exempt sale of property
• Claw back of 90% of VAT on purchase and
all of vendor’s VAT on professional costs

12. SOLUTIONS?
• Sell to a developer
who could use the
planning permission
to build and sell
dwellings zero-rated
to housing
association
• Golden brick it

13. ZERO-RATED SALES
• First sale of a major interest in a
“qualifying building” by “person
constructing” is zero-rated
• Qualifying building is dwelling, relevant
residential or relevant charitable building
• Zero-rating can apply to sale of partly
completed building
• A zero-rated sale is taxable so does not
lead to a capital goods scheme claw back

14. GOLDEN BRICK
• Partly completed
building
– Must be above
foundation level
– Need not be above
ground level
– Digging and
concreting foundations
alone not enough
• Problem with
deposits?

15. DEPOSITS – PROBLEM?
• No tax point until completion so long as
any deposit received as stakeholder
• But does that mean vendor cannot
meanwhile access the deposit to fund
golden brick works?
• At time of deposit the vendor appears to
be selling existing building – exempt not
zero-rated

16. DEPOSITS – THE SOLUTION
• HMRC state that the VAT treatment of the
deposit is determined by reference to the
anticipated state of the asset at the time of
completion
• Contract must make clear that it is a sale
of a major interest in a partly completed
building rather than of land/existing
building

17. BUILDING CONVERSIONS -
QUESTIONS
• Builder buys pub with
top floor manager’s flat
• What VAT rate does he
pay and what can he
recover if
– He renovates and sells
one house
– He renovates the flat
and turns the pub into a
2nd flat and sells 2 flats
– He turns the pub into 2
houses for sale?

18. BUILDING CONVERSIONS –
“ANSWERS”
• One house – work at 20% (not
recoverable)
• Two flats – ground floor work at 5%
(recoverable); upper floor at 20% (not
recoverable)
• Two houses – all work at 5%
– Per HMRC, none recoverable
– Per Tribunal – all recoverable (back claims?)

19. CASE STUDY 3
• Developer buys pub with planning
permission:
– To convert pub into flats
– To build 2 houses in grounds
• Developer fails to sell flats or houses and
grants ASTs
• VAT problems?
• VAT solutions?

20. CASE STUDY 3
• Capital goods scheme adjustments for
each year of the leases within adjustment
period
• Developer should grant major interest in
the properties to own company
• His supply zero-rated
• Exempt supplies made by company with
minimal input tax
• “HMRC approved” VAT planning

21. CASE STUDY 4
• Company granted a lease on a building in
2008
• It opted to tax the building
• In 2012 it sold the building subject to the
lease
• Contract drafted on expectation of TOGC
• The purchasers did not opt to tax

22. THE OPTION TO TAX AND THE
TOGC RULES
• No TOGC on the sale of a building where
vendor has opted to tax unless:
– There is a transfer of a business as a going
concern with the purchaser using the asset in the
same kind of business as the vendor
– The purchaser is or will become VAT-registered
– By completion:
• The purchaser opts to tax
• The purchaser notifies HMRC of that option to tax
• The purchaser notifies the vendor that the option to tax
anti-avoidance rules will not apply

23. CASE STUDY 4 – VAT
CONSEQUENCES FOR VENDOR
• There is a transfer of a property rental
business as a going concern
• Purchaser did not opt to tax, so one of the
conditions not met
• Vendor must charge VAT

24. CASE STUDY 4 – WHAT SHOULD
THE PURCHASER HAVE DONE?
• Purchaser should have registered for VAT,
opted to tax and notified HMRC before
completion so that vendor would not charge
VAT
• Failing that, purchaser should have
registered and opted to tax before any rent
invoices issued. Purchaser could then have
claimed the VAT
• Having done neither, did the purchaser have
any scope to back date the option to tax?

25. “BACKDATING” THE OPTION
TO TAX
• Option to tax a 2-stage process
• Belated notification
• What it means
• When might HMRC allow it?
– Where VAT has been charged on rents
– Not to make a TOGC after the event (but policy
apparently inconsistent)
– Not where landlord has refunded VAT
• “Retrospective” option to tax – “illegal”,
illogical and not HMRC policy

26. CASE STUDY 5
• A owns freehold in a hotel
• B has an operating lease
from A and runs the hotel
• A and B are in common
ownership
• C wants to buy the
freehold and run the hotel
• How must C structure its
offer to achieve TOGC and
limit SDLT if:
– A and B are not in a group
registration?
– A and B are in a group
registration?

27. WHAT ARE THE PROPER LIMITS
TO TOGC TREATMENT?
• Zita Modes (2003)
• Robinson Family (June 2011)
• Christel Schriever (November 2011)
• Revenue Briefs 30/12 and 08/13

28. ZITA MODES
• EU VAT Directive allows member states to
“de supply” TOGCs
• If member state does so, they can only
exclude transfers where transferee is not a
taxable person or only acts as such in
relation to some of his activities
• Designed to take away burden of VAT where
it would be fully recoverable anyway
• Only applies to transfers of business/part of a
business and not to asset transfers or
transfers with view to liquidation

29. CHRISTEL SCHRIEVER -
FACTS
• CS ran sports equipment
shop from her own
premises
• Sold stock and fittings to
own company as TOGC
• Granted lease on premises
to same company for
indefinite period but
subject to cancellation at
short notice
• Tax Office assessed on
basis no TOGC because
premises an essential
component of business

30. CHRISTEL SCHRIEVER - CJEC
• Referred to reasoning in Zita Modes
• Nothing to say successor must own
premises as well as business
• Premises may be leased, or successor
may have own premises

31. ROBINSON FAMILY
• Per 700/9 no TOGC if you grant a lease as it is a new asset
• Robinson Family Limited – changed policy
• Appellant used Unit 3 as letting business
• Unit 3 held on 125-year lease
• Appellant could only dispose of business by granting shorter
sublease
• Per Tribunal this was TOGC
• HMRC now accept TOGC, provided value of asset retained
not more than 1% of total value before transfer
• HMRC have now agreed to SDLT refunds
• HMRC have still not addressed impact on:
– Property transfers by other types of business
– Surrenders

33. QUESTIONS