Real Estate things you once knew but may have forgotten - Knowing when a tax point arises

VAT - Knowing when a tax point arises

The sale or lease of commercial property frequently attracts VAT. The VAT legislation contains complex rules for determining when the sale or lease occurs for VAT purposes (the tax point). The importance of the tax point is that it determines the date upon which the supplier must account to Customs & Excise for the VAT arising in relation to the sale or lease.

The tax point rules are complex but the following points commonly arise in the context of commercial property:

1. The tax point for the sale of freehold land and buildings is the date when the land and buildings is made available to the purchaser. This will normally be the date of completion and this will not normally be affected by the seller permitting the purchaser access to the property in advance of completion (e.g. for the purpose of carrying out preliminary works). This basic tax point is varied if the seller issues a VAT invoice prior to completion or receives payment in advance.

2. On the sale of a freehold, it is common for the purchaser to pay a deposit on exchange of contracts. Where the deposit is paid to the seller's solicitor as agent for the seller, this will create a tax point to the extent of the sum received. Where the deposit is paid to the seller's solicitor as stakeholder no tax point is created.

3. The price paid for the freehold may not always be ascertainable at the date of completion. To the extent that the price is ascertainable, the normal tax point rules apply. Where all or part of the price is not ascertainable (e.g. it is payable at a later date in accordance with a formula which is calculated by reference to profits from a future development of the land) the tax point will arise on the earlier of a subsequent issue of a VAT invoice and when the seller receives a payment.

4. It is common for the sale of an investment property to attact transfer of a going concern ("TOGC") relief which, provided that specified conditions are met, will mean that the sale is treated as being outside the scope of VAT. Therefore, no tax point arises. However, in order to obtain TOGC relief (in circumstances where the sale would otherwise be subject to VAT) it is necessary for the purchaser to opt to tax the land and buildings and notify Customs of it prior to completion. In practice, this is often carried out during the period between exchange and completion. Where the purchaser pays a deposit to the seller's solicitor as agent for the seller then, in order for TOGC treatment to be available, the purchaser must opt to tax and notify Customs prior to exchange. If this is not done, a tax point will arise at exchange and the sale will not take place as a TOGC.

5. In most cases the tax point for rents payable under a lease will be the earlier of the date on which a VAT invoice is issued in respect of the relevant quarter's rent and the date of the receipt of the rent. It is good practice for landlords to issue a rent demand (and not a VAT invoice) initially and only issue a VAT invoice once the rent has been received. Some landlords issue a VAT invoice before payment which means that if the tenant defaults on payment of the rent the landlord must nevertheless account to Customs & Excise for the VAT element even though the landlord has not received it from the tenant. Although ultimately VAT bad debt relief will be available if the landlord is unable to recover the arrears of rent there may be a considerable time delay before recovery is made.

6. The VAT legislation permits landlords to rely on special arrangements whereunder a landlord may issue an invoice at or about the beginning of any period not exceeding 1 year. Provided that the invoice contains specified particulars, a tax point will only arise as and when the landlord receives or becomes entitled to receive the rent. Whilst this may reduce administration for the landlord it would still mean that the landlord would have to account for VAT as soon as there is an entitlement to the rents (even if not received).

For further information on this topic please contact Mike Boutell at mike.boutell@cms-cmck.com or on +44 (0) 20 7367 3000.