Simplifying VAT on Land and Property

Published / Last Updated on 27/05/2021

HMRC has issued a consultation paper calling for evidence to simplify the VAT on land and property exemption.

VAT on property and land can be complex.  Currently, most transactions are exempt from VAT.  That said, some properties and land can be subject to VAT.

Option to Tax

You can elect for an ‘option to tax’ with HMRC.  Usually, this may be where you or a developer has bought some land to build on and by ‘opting in’ for VAT, you can then reclaim any VAT on building materials, costs and labour.

  • The issue then is when you come to rent the property out or sell it, VAT must be added to the rent or resale price.
  • In addition, once the land is ‘opted in’, it cannot be opted out.

This actually happened to us (the directors of this firm) where we personally owned our office in Cornwall, we then decided that our SIPP pension fund would buy the property from us for tax and rental income reasons.  Sadly, the SIPP manager’s administration team incorrectly opted the property in for VAT meaning that all rents would have VAT added and if our pension fund ever looks to sell the property, VAT would needed to be added to the sale price.  The SIPP could not reverse the ‘opt in’ but before the transaction completed, we were able to move our pension funds to a brand new SIPP pension and then the new pension bought the office from us personally without completing any option to tax.  Therefore, rents payable and any future sale are both still VAT free.  A costly exercise for the old pension scheme as it costs them £10,000 in additional legal and administration fees.

It is also very difficult to find out whether land has been opted in to tax as it is not logged at HM Land Registry (and only at HMRC) meaning that many properties have bought/sold with parties unaware that VAT was payable and then a huge, unexpected VAT bill lands after the sale.

HMRC wants to simplify this and the following suggestions have been made:

  • Remove the ‘option to tax’ so that all land is exempt – our preferred option.
  • Make all land and property subject to VAT with the option to exempt – again too big an impact on the market.
  • Make all land and property subject to VAT but at a reduced rate – too big an impact on all property but would raise huge amounts of revenue for HMRC.
  • Make all commercial land and property only subject to VAT.
  • Finally, it has also been suggested that the VAT status of the land should also be recorded in the title deeds at HM Land Registry making it so much easier to identify its tax status – this is a must in our opinion.

Responses should be sent to HMRC by email to by 3 August 2021.

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