VAT on land purchased as an investment.

01.01.06

VAT on land purchased as an investment.

The starting point for VAT on property purchases relates to the general rules about VAT on land. These rules are to the effect that supplies of land are exempt from value added tax, but that rule is subject to a bewildering range of exceptions.

It is essential to look closely at the VAT position early in any transaction, to see what can be done to minimise the costs and improve cashflow...

Unlike most taxes, exemption from value added tax does not bring unbridled advantages. Indeed, exemption can lead to economic loss, as those making exempt supplies are unable, generally, to recover value added tax on supplies made to them.

It is thus essential for anyone purchasing property to assess the position for value added tax from the very outset. Property purchases may involve a supply for VAT purposes which is exempt, zero-rated (which is very different from exempt), standard rated (at 17.5%) or even chargeable (at least to some extent) at the reduced rate of 5%.

Beyond even these possibilities, it may be that the purchase of a property for investment is outside the scope of VAT entirely. This occurs where there is a transfer of a going concern, the rules on which are complex and subject to a number of important conditions. All of these will need to be addressed at the time of negotiation for the purchase, as leaving it until a transaction is completed may well be too late.

At the very least, failing to address the issue of VAT on a property purchased for investment can lead to a cash-flow disadvantage; but at worst it can lead to losses large enough to prejudice the whole economics of the investment.

On a more positive note, early planning can produce actual savings of VAT - but the emphasis must be on the "early"!

The combination of advisers from the Property and Tax teams at Brodies can assist you through this process - and help you on the road to VAT planning for the future.

For further information, please contact:

Alan Barr 0131 656 0103 email alan.barr@brodies.com
Stephen Miller 0131 656 0346 stephen.miller@brodies.com