Property VAT update for developers – avoiding the pitfalls! 14 June 2017

1. Property VAT update for developers – avoiding the pitfalls! 14 June 2017

2. Adrian Houstoun Head of VAT E: ajh@ks.co.uk T: 020 7566 3802 Debbie Jennings VAT Principal E: djennings@ks.co.uk T: 020 7566 3735 Geraint Lewis VAT Principal E: glewis@ks.co.uk T: 020 7566 3830

3. Latest Cases and Developments Pub Conversions 1. Latest cases and developments Pub conversions 2. Other cases 3. Questions

4. Latest Cases and Developments Pub Conversions One pub becomes two or more flats HMRC had successfully challenged such cases e.g. Calem Vale on the basis that they did not fall within Note 9 (Sch 8 group 5) which requires an additional dwelling to be created Jacobs Court of Appeal and Alexandra Countryside Investments FTT

5. Pub Conversions Alexandra Countryside Investments Pub which included living accommodation for the manager converted into two semi detached houses Based on making a zero-rated sale input tax was reclaimed HMRC objected – not a conversion from non dwelling to dwelling Review was requested; Tribunal very critical of the review conducted by HMRC which basically said “we are right you are wrong”

6. Pub Conversions Tribunal found for taxpayer Followed Jacobs and not Calem Vale An additional dwelling has been created as required by note 9 The Tribunal also refuted HMRC’s view that the rules were different for businesses and DIY builders

7. Pub Conversions “We conclude that Ward LJ’s analysis of Note 9 gives the clear answer to the current case. The fact that an additional dwelling has been created means that Note 9 does not prevent the conversion coming within Item 1(b). Accordingly the sale of the houses will be zero-rated, and the input tax is recoverable.”

8. Restrictions to Zero-Rating • Haberdashers Arms - Battersea

9. Restrictions to Zero-Rating

10. Landguard – Could sales be zero - rated? • Sale of dwellings 3 and 4? • - Languard and HMRC in agreement • Sale of dwellings 1 and 2? • - HMRC said no to zero-rating because new dwellings created out of commercial and residential sections of old house • - Tribunal?

11. Landguard – Could sales be zero - rated? “In considering Note 9 we have regard to the number of dwellings which existed in the public house before the conversion, and the number of dwellings which exist as a result of the conversion of the non-residential part. There was one dwelling in the public house prior to conversion. As a result of the non-residential part of the public house becoming part of a building designed as four dwellings, four dwellings exist. So we conclude that the major interest grant in each of the lower maisonettes does fall within Item 1(b) of Group 5, and is not excluded by Note 9

12. Latest Cases – New Build or Conversion New Build of appropriate buildings can have favourable status e.g. zero-rating whilst conversion works are likely to be standard rated Astral Construction Old redundant derelict church developed into 72 bed care home The church formed approximately one third of one wing - 315 Sq metres Three new wings created forming a square 1,590 Sq metres – ground floor and 1,320 Sq Metres -first floor

13. Latest Cases – New Build or Conversion The Tribunal stated that it was a question of fact and, contrary to HMRC’s submission, the Tribunal considered it to be a question of degree As a matter of impression, size, shape, function and character it is so vastly different from the existing church that it cannot be said to constitute the conversion of the church or an enlargement of or extension to the church, and that the works do fall to be zero rated

14. Latest Cases – Blue Chip Hotels • Was room for civil wedding exempt or standard rated? • Useful list suggested for determining whether an agreement was for leasing or letting immoveable property • - (1) confer on the tenant the right to occupy the property as if the tenant were the owner • - (2) allow the tenant to exclude from enjoyment of such a right persons who are not permitted by law, or by the contract, to exercise a right over the property;

15. Latest Cases – Blue Chip Hotels • - (3) be for an agreed period which may be restricted but must not be occasional and temporary; • - (4) be in return for payment.

16. Other cases • Oval Estates Bath

17. Any questions?

18. Debbie Jennings VAT Director E: djennings@ks.co.uk T: 020 7566 3735

19. VAT Reliefs: Converting and Developing Residential Property • Creating “dwellings”….how? • Dwellings: newly constructed, converting from commercial, reconfiguring existing residential properties? • Utilising the zero rate and the 5% reduced rate • Applies to: “qualifying construction/conversion services”. Not professional fees • VAT treatment of the sales/supplies

20. 5% Reduced Rate • Qualifying conversion services: existing buildings • What you start off with is not what you end up with! • Start with commercial, convert to dwellings • Start with dwellings, but end up with a different number of dwellings • Also, applies to conversions involving “bedsit” type buildings, “Relevant Residential Use”, e.g. student accommodation, etc. • VAT recovery: based on intended use of the converted properties and what you started with

21. Zero Rate • Construction of new dwellings • Not conversion or extension • Can apply to new self contained dwellings added to an existing building • For example, adding new flats to the top of an existing block of flats • Only applies to the construction costs, not the professional fees • Can be worth setting up a design and build entity if going to be put to an exempt use and the irrecoverable VAT costs justify this

22. Mixed Use developments • Could be conversion, new build, or both • Mixed use: dwellings and commercial elements • Costs: various VAT rates applicable • Common areas: apportion the values and the VAT rates appropriately • Cannot apply a blended rate!

23. Examples • Existing building of shops on the ground floor, flats above: refurbish • Commercial building: convert top floors to flats • Build all from scratch, completely new • Convert part of a commercial building to residential, and add new flats on top

24. What is a New Dwelling? • Self contained living accommodation with no internal access to another dwelling • No restriction on separate use or disposal, but could have a restriction on use, e.g. for over 55’s • Statutory planning consent: C3

25. Non-Residential Conversions • Factories, offices, pubs etc. • Some may be mixed use: pubs that include a flat above? • 5% reduced rate on conversion costs • VAT treatment of disposal: it depends • Need to plan from the outset

26. Residential: Empty for Minimum of Two Years • Renovation, refurbishment of empty dwellings • No need for a conversion/different configuration • 5% reduced rate of VAT • Need to meet the conditions: proof of length of time it has been empty

27. White Goods: VAT Impact • “Goods ordinarily installed”: OK • Specific VAT Blocking Order for “White Goods” • Fridges, carpets, ovens etc. • Grey area: wooden/laminate floors OK, not carpet

28. VAT Treatment of Disposals • First grant by a person constructing of a major interest in a newly constructed dwelling: zero rated • First grant of a major interest by the person carrying out the conversion works in a dwelling/dwellings that have been created from converting non-residential property: zero rated • Either of the above not being the disposal of a major interest: exempt • Any disposal of dwellings that were originally dwellings: exempt

29. Watch Out for “Holiday Accommodation” or Similar • Short term lets, held out as holiday style accommodation: Subject to VAT • Increasingly a grey area: AirBnB type arrangements • Could the TOMS scheme apply, therefore only VAT due on the margin? • Need to monitor

30. VAT Mitigation: Design and Build • Where properties are going to be put to an exempt use • Mitigate the irrecoverable VAT on professional fees • Design and build entity: contracts for all the services, recovers the VAT • Charge to the developer: all elements follow the VAT liability of the construction services • Needs to be properly structured and implemented

31. Conclusion • VAT: be aware, plan from the start • Needs to be built into business plans and strategic decisions • Opportunities for mitigating the impact • If in doubt, ask. • KS VAT Team are happy to help!!

32. HMRC “taskforce” on TOGC’S Geraint Lewis VAT Director E:glewis@ks.co.uk T: 020 7566 3830

33. VAT & Property Update: TOGC’s • For commercial investment property, TOGC sales have been the “default option” for many years. • Rules are well understood • Standard contracts • But are HMRC now using the details of the legislation, and the standard contract wording to raise extra revenue?

34. VAT & Property Update: TOGCs • SPV Prop Co sells investment property to ABC Limited, as a TOGC • Standard contract warranty that SPV has opted, and that ABC Limited will opt and notify HMRC of the option prior to sale • Sale proceeds as a TOGC

35. VAT & Property Update: TOGCs • Some time later SPVde-registers • HMRC sends a questionnaire to SPV enquiring as to what happed to the opted property • SPV confirms sold as TOGC to ABC Limited, provides dates etc

36. VAT & Property Update: TOGCs • HMRC then review their option to tax records for ABC Limited • If ABC Limited failed to notify option prior to the sale:- • HMRC issue assessment against SPV on the basis that sale was a taxable supply not a TOGC

37. VAT & Property Update: TOGCs • Assessments to date including cases where the option was effective on completion, but notified late • Vendor may be able to rely on the contractual wording to recover the VAT from the purchasers, but what happens if the purchaser has “flipped” the building? • Putting the wording in the contract is not always enough!!!!

38. Alienation Clauses & Planning Permission:- AKA when is a dwelling not a dwelling?

39. VAT & Property Update: Alienation Clauses & Planning Permission • For an apartment, house etc to be a dwelling for VAT purposes it must a pass various tests • Some of these are “physical” e.g own front door, no internal access, bathroom etc • Other less well known tests: • Constructed in accordance with planning permission • Right of separate use and disposal

40. VAT & Property Update: Alienation Clauses & Planning Permission • Building something in accordance with planning, seems simple • But what happens if the plans change? Or evolve to reflect subsequent events? • Or if a practical “planning solution” is agreed to deal with local issues?

41. VAT & Property Update: Alienation Clauses & Planning Permission • Courts have concluded that if something is done before planning permission to build new resi is granted, work is not zero-rated, even if planners are in agreement, and retro permission is granted • If what you have is not resi planning permission, then even if the building meets physical tests for dwellings construction is not zero rated? • No prohibition on separate use and disposal • Originally used for “granny flats” etc, but becoming a problem for certain resi developers especially for things like student accommodation where funders etc want to protect against enfranchisement etc

42. VAT & Property Update: Alienation Clauses & Planning Permission • Case law is complex and confusing • But courts have concluded that separate disposal means the ability to grant long term rights of occupation in individual dwellings. • So in a block of flats, or student accommodation, right to lease or assign the whole building is not enough.

43. VAT & Property Update: Alienation Clauses & Planning Permission • You must able to grant occupancy rights in individual units • Courts have not said how long this needs to be for, but HMRC have chosen to define “disposal” by reference to “major interest” so more than 21 years (NOT 21 years or more).

44. VAT & Property Update: Alienation Clauses & Planning Permission • For student accommodation HMRC have accepted that restrictions in mortgages etc OK, but not in leases, or for other property documentation • Restricting rights, e.g type of user is OK, but they cannot amount to a prohibition, so • restricting leasing to residents of a particular borough probably OK, but • restricting to members of two families notOK

45. Finally……. Any questions?

46. Contact details Heather Powell Head of Property E: hpowell@ks.co.uk T: 020 7566 3811 Adrian Houstoun Head of VAT E: ajh@ks.co.uk T: 020 7566 3802 Debbie Jennings VAT Principal E:djennings@ks.co.uk T: 020 7566 3735 Geraint Lewis VAT Principal E: glewis@ks.co.uk T: 020 7566 3830 www.kingstonsmith.co.uk/property