RESIDENTIALlettings
It’s VAT crunch time! Tax expert Abigail Day says it’s time to get the numbers right.
M
any businesses are approaching the end of their first VAT accounting period following the change in the
VAT rate from 17.5 per cent to 20 per cent on 4th January 2011. It may not be too late to check your understanding of the implications for your property business. There may still be time to correct mistakes by the issue of a credit note and a fresh VAT invoice. Here are a few scenarios where the rate change makes a difference:
Rent The typical rent quarter beginning on 25th December 2010 and ending on 24th March 2011 spans the rate change. If the rent is due in advance and either a VAT invoice is issued or payment is received before 4th January, the 17.5 per cent rate will apply to the rent for the entire period. If the landlord issued a rent demand before 4th January, but the tenant did not pay and the VAT invoice was not issued until after 4th January, the 20 per cent rate would apply. If the rent is payable in arrears, the landlord can either apply the 20 per cent rate to the entire period, or split it, charging 17.5 per cent up to and including 3rd January, and 20 per cent afterwards. If the tenant cannot recover VAT in full (for example, many in the financial services industry), it will prefer the split treatment.
Rent deposits Landlords should check the terms of the rent deposit to see whether they can ask the tenant to top it up to take account of the rate change. Otherwise, the landlord could be out of pocket by the amount of the increase if the deposit is needed to cover the rent, as it will now have to account for VAT at 20 per cent.
ConstRuCtion seRviCes Construction contracts typically have monthly stage payments and retention payments. Where an amount is invoiced or paid before 4th January, the 17.5 per cent rate applies. If the amount relates partly to work done before 4th January and partly after, the constructor can either charge 20 per cent VAT or can split the amounts incurred before and after 4th January, charging 175 per cent on the pre-4th January amount and 20 per cent on the later amount. Clients who cannot recover VAT in full will prefer the split treatment.
puRChases and new leases If a purchase of land and buildings is completed after 4th January, the VAT rate will still be 17.5 per cent if an invoice was issued or a deposit was paid before that date, provided it was held by a solicitor or other person as agent, not as stakeholder. A grant of a lease at a premium before 4th January will generally attract 17.5 per cent VAT, 20 per cent if granted on or after that date. If granted before the 4th but the premium is invoiced or paid later, the landlord may choose which rate to apply. Stamp Duty Land Tax has effectively
been increased for some purchases and new leases of land and buildings where the effective date for SDLT (typically completion) is after 4th January 2011. This is because where the transaction is subject to VAT, for example, freehold commercial
properties within three years of their construction, or properties which have been opted to tax, the SDLT due is calculated on the VAT-inclusive purchase price, or on the grant of a lease, the net present value of the aggregate of the VAT-inclusive rentals payable over the duration of the lease. Failure to factor this in will mean that SDLT has been underpaid, and penalties may arise.
pRepayments and eaRly invoiCing Clients that cannot recover all their VAT may ask you to allow them to pay in advance, or ask you to invoice in advance at 17.5 per cent VAT. This works to an extent, but there are limits – where it is blocked by anti-avoidance legislation, you would have to charge an additional 2.5 per cent VAT, and you would be liable to HMRC for the extra amount. The warning signs for this include a client connected with you, the value of the supplies exceeding £100,000 where the advance invoicing or payment is not normal commercial practice; invoices issued where payment is not required for more than six months, or you, the supplier, having financed the advance payment. HMRC has indicated that they will
apply a “light touch” to errors in the first period where there is no overall loss of revenue, but given that penalties for VAT errors are based on the amount of tax owed, mistakes just became more expensive.
Abigail Day is a consultant at Howard Kennedy. She is a member of the Law Society’s Corporation Tax Committee and the Institute of Tax’s Professional Standards Committee.
Do you have any views or experiences to share?
www.propertydrum.com/articles/newVAT
PROPERTYdrum MARCH 2011 61
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