In March's Budget 2021, the chancellor announced that HMRC would look again at simplifying the value-added tax (VAT) rules for land and property. The Office of Tax Simplification (OTS) conducted a VAT review in 2017, which included recommendations for the simplification of the VAT treatment of land and property that were not taken forward. The issue has, however, come back to the table – no doubt, driven by the government's ability, having left the EU, to extend or reduce unilaterally the scope of the VAT exemption.
On 12 May 2021, HMRC published a call for evidence, which closes on 3 August 2021. The call for evidence is split into two parts: the first part looks at the increasing complexity of the VAT land and property rules and the factors driving the need for simplification; and the second part discusses possible solutions and includes the options for simplification previously identified (but ultimately rejected) by the OTS in 2017.
In broad terms, transactions in land are exempt from VAT, subject to a number of specific exceptions. This once relatively simple rule (which originally included just four exceptions to the exemption) has increased in complexity over the years and now contains 15 exceptions and 26 sets of notes. Further complexity also arises in determining what constitutes an exempt supply of land or a taxable supply of facilities. In addition, the "option to tax", which enables a taxpayer to waive the exemption and opt to tax the land or property, can be complicated, administratively burdensome and unclear (as there is no central facility for a buyer to check whether a property they are purchasing has been opted to tax by the seller).
In trying to address the question of simplification, HMRC sets out a wide range of possible solutions in the call for evidence, whilst also stressing that it welcomes any other options or suggestions of how the rules could be simplified.
The options for simplification include the following (the first three having been identified as options in the OTS simplification review in 2017):
- Removing the ability to opt and making all relevant transactions exempt.
- Removing the option to tax and making all land and property taxable at a reduced rate.
- Making all commercial land and property taxable at the standard rate with an option to exempt.
- Defining short-term or minor interests as subject to VAT.
- Making most supplies subject to VAT but exempting specific supplies (such as residential accommodation and charitable buildings).
- Linking VAT liability to the Land Registry