Real Estate things you once knew but may have forgotten - VAT

VAT treatment of payments for the release of easements and restrictive covenants

It is not uncommon for the owner of a site ("Development Site") to make a payment to the owner of adjoining land ("Adjoining Site") in return for the owner of the Adjoining Site releasing the Development Site from an easement or restrictive covenant which benefits the Adjoining Site. Market practice has been to treat the owner of the Adjoining Site as making an exempt supply of land unless the option to tax has been exercised (in which case VAT will be chargeable).

However, what has been less clear is over which land the owner of the Adjoining Site should opt if he wishes to charge VAT. Not unnaturally the focus has been on whether the owner of the Adjoining Site has elected to tax the Adjoining Site. Customs & Excise's only public announcement on the issue is in relation to restrictive covenants (but it is reasonable to assume that Customs’ view is the same for easements). In paragraph 4.8, Customs & Excise Notice 742 (December 1995) Customs state: "the lifting of a restrictive covenant is exempt from VAT unless the person receiving payment has opted to tax the land, in which case they are standard rated."

Customs & Excise's Notice 742 (December 1995) is not clear; it simply refers to opting to tax the land without identifying which land. However, Customs & Excise have issued a revised Notice 742 (dated March 2002). It now states that: "if you agree to give up a restrictive covenant in return for payment your supply will be exempt, unless [you] have opted to tax the land the restrictive covenant applied to." Whilst this statement could be clearer, this seems to confirm that Customs' view is that in order for the owner of the Adjoining Site to properly charge VAT on the payment he receives in return for releasing the Development Site from the restrictive covenant, he must opt to tax Development Site (despite the fact he does not own or occupy the Development Site). Whether the owner of the Adjoining Site has elected over his own land is irrelevant. Indeed we have corresponded with Customs & Excise on this point and this is indeed what the statement in the revised Notice 742 is intended to convey.

It is unusual for the owner of land to opt to tax over somebody else's land but as a matter of strict law, Customs' view would seem to be correct. The surrender of any interest in, or right over, land is exempt unless the option to tax has been exercised in relation to that land. The nature of an easement or restrictive covenant is such that where the Adjoining Site has the benefit of an easement or restrictive covenant over Development Site then this is an interest in, or right over, Development Site and therefore if VAT is to be properly charged it is necessary for the owner of the Adjoining Site to opt to tax the Development Site.

For further information please contact Mike Boutell on +44 (0)20 7367 2218 or at michael.boutell@cms-cmck.com.