In an update to their VAT Land and Property manual, HMRC have issued new guidance in relation to the VAT treatment of overage payments. If you’re a property developer or landowner, it’s important to be aware of how this guidance may affect property sales.
What are overage payments?
These are additional payments under the original sales contract, made by a buyer to reflect post-sale increases to the value of the land or building(s) sold.
While HMRC’s guidance on this is straightforward, it is easiest to understand by viewing overage payments as following three principles: the general as-a-rule, the actual rule and the new commercial building rule.
The general as-a-rule
HMRC start by saying that, generally, the overage payment will follow the original VAT treatment of the sale of the land.
This is akin to saying that it often rains in England. While true in a statistical sense, it wouldn’t make for a particularly helpful weather forecast.
The actual rule
HMRC then explain that the tax point rules will generally determine the VAT treatment, i.e. the time of supply of an overage payment is when that payment is received. The VAT treatment follows the status of the land or property (in relation to the seller) at that time. Therefore:
- If a seller sells an (unopted) old commercial building, the supply should be exempt from VAT.
- If the seller subsequently opts to tax the building (let’s say the seller wishes to take a lease of part of that building, sublet that part to another business and recover related input VAT), the overage payment (received after opting to tax) should be VATable.
The new commercial building rule
HMRC qualify that the actual rule will not apply to new commercial buildings. New commercial buildings are standard-rated for the first three years after completion. So:
- If you sell a new commercial building and receive an overage payment more than three years after the building was completed, the overage payment will still be standard rated.
- If you sell bare unopted land and receive an overage payment, the overage payment will remain VAT-exempt despite a new commercial building having been built on that land in the interim.
Would you like to know more?
The above is a rather simplified summary of what is already a brief analysis by HMRC of the VAT treatment of overage payments in HMRC manual VATLP02900. If you have any questions relating to the VAT treatment of any specific overage payment scenario, or would like more information about property VAT, get in touch with Simon Levine or send us an enquiry.
