VAT on Property and Land Transactions

Introduction

VAT treatment of property transactions can be complex, with different rules applying depending on whether you're selling, leasing, or renting land and buildings. Most property transactions are exempt from VAT, meaning you don't charge VAT but also can't reclaim VAT on related costs. However, you can choose to opt to tax commercial property, making your supplies standard-rated and allowing you to recover input VAT.

What counts as land for VAT purposes

For VAT purposes, "land" includes buildings, civil engineering works, walls, trees, plants, and any other structure or natural object attached to it. When you make a supply of land, you're granting an interest in, right over, or licence to occupy land in return for payment.

An interest in land can be either:

• Legal interest – formal ownership of an interest in or right over land, such as a freehold or leasehold interest
• Beneficial interest – the right to receive the benefit of any supplies made of the land, such as sale proceeds or rental income

You don't need to own land to opt to tax it. You can opt to tax based on any interest you hold.

When property supplies are exempt from VAT

Supplies of land and buildings are normally exempt from VAT. This includes:

• Freehold sales
• Leasing or renting
• Granting licences to occupy

When a supply is exempt, you don't charge VAT on it, but you cannot normally recover any VAT you incur on your own expenses related to that supply.

Licences to occupy land

A licence to occupy exists when the agreement grants the occupier a right to occupy a defined area of land for an agreed duration in return for payment, with the right to occupy as owner and exclude others. All these characteristics must be present.

Examples of licences to occupy include:

• Provision of office accommodation with shared facilities
• Serviced offices (where use of phones, computers, and photocopiers is incidental to the office space)
• Shop concessions within a larger shop
• Space for advertising hoardings
• Fixed kiosk locations at stations
• Hall hire for meetings or parties
• Catering concessions with specific kitchen and restaurant areas
• Market pitches or car boot sale spaces

What the option to tax means

The option to tax allows you to make supplies of land and buildings standard-rated instead of exempt. Once you opt to tax, all supplies you make of your interest in the land or buildings will normally be standard-rated at 20%, and you'll normally be able to recover any VAT you incur in making those supplies.

This can be beneficial if you're incurring significant VAT on costs related to the property and your tenants or buyers are VAT-registered businesses who can recover the VAT you charge them.

What you're opting to tax

When you opt to tax, you can specify an area of land or a building. The scope of your option depends on what you specify:

If you specify a building:

• The option applies to the whole building and the land within its curtilage (the land immediately around the building, including forecourts and yards)
• If your interest is restricted to one floor, the option still covers the remaining floors
• The option continues to apply to the land even if the building is demolished
• The option applies to any future buildings constructed on that land

If you specify land:

• The option applies to any buildings on the land and future buildings constructed on it
• The option covers the discrete area you specify and doesn't affect adjoining land

Buildings treated as a single building

For option to tax purposes, certain structures are treated as a single building:

• Buildings that are linked, or planned to be linked
• A complex with units grouped around a fully enclosed concourse, such as a shopping mall

A link means internal access or a covered walkway between buildings designed to allow movement of goods and people. It doesn't include car parks, public thoroughfares, or statutory requirements like fire escapes.

Excluding new buildings from your option

If you construct a new building on land you've opted to tax, that building will automatically be covered by the option unless you notify HMRC that you wish to exclude it. You can specifically exclude new buildings from the effect of your option if you wish.

The curtilage of buildings

When you opt to tax a building, the option extends to land within its curtilage. For buildings in large areas of land, the extent of the curtilage depends on how far the services of the building can be used.

For example, a racecourse grandstand providing electricity and shelter for stalls would extend the option over the whole area benefiting from these services. An option would normally extend to areas adjacent to a building used for ancillary purposes, such as car parking.

Options exercised before 1 March 1995

Different rules apply to options made before 1 March 1995 for:

• Agricultural land
• Units within a parade, precinct, or complex (such as a row of shops or retail precinct)

If you opted to tax such property before this date, contact HMRC's Option to Tax Unit for guidance on the scope of your option.

Notifying HMRC of your option to tax

You must notify HMRC when you opt to tax land or buildings. Temporary changes to notification time limits introduced during coronavirus ended on 31 July 2021. HMRC continues to accept electronic signatures subject to certain conditions.

When notifying HMRC about land and property supplies, you may need to provide:

• Third party evidence that you own, intend to purchase, or have a beneficial interest in the property (such as Land Registry documents, leases, or solicitors' correspondence)
• A copy of planning applications, planning permission, or prior approval notices
• For expired planning permissions, evidence that development started within the permitted timeframe or that you've reapplied

If you don't provide all required information, your application will be delayed.

Demolition of opted buildings

If a building you've opted to tax is demolished or destroyed, your option still applies to the land where the building stood and to any future buildings constructed on that land.

However, if you opted to tax before 1 June 2008 and your notification made clear the option was on the building only (for example, you specified "Building at 1 High Street"), you can treat the option as revoked once the building is demolished. You don't need to notify HMRC before revoking, but you should retain evidence in case it's requested.

Sources

• Opting to tax land and buildings (VAT Notice 742A)
• Land and property (VAT Notice 742)
• Tell HMRC about land and property supplies you're making

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.