What is a supply of commercial land for VAT purposes?

Jaspal Dhillon, 23 March 2022

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The VAT rules on land and property often comes with a lot of complexity, one area in particular being what is a supply of commercial land.

If you are supplying land, then this is not subject to VAT (it is VAT exempt) however like many things, this is subject to a number of exceptions, for example you may have opted to tax.

If you do not meet the definition of a supply of commercial land for VAT purposes, then this is likely to be subject to VAT at the standard rate of 20%, with or without the option to tax.

What is HMRC’s understanding?

Although at first glance it would seem obvious that you are either supplying land (i.e. letting office space) or not, HMRC have their own interpretation of what a supply of commercial land is.  

HMRC’s interpretation of the VAT legislation is broadly that, for there to be a supply of land, it has to be passive and once other services are supplied with the land, this then becomes non-passive and can fall outside of the VAT exemption. This can result in having a big impact on a landlord’s profit margin, especially where the customer cannot recover VAT on their costs or is unwilling to pay a net cost-plus VAT.

An example of what HMRC consider to be a supply of land

If a landlord lets office space, this should qualify as a supply of land. As long as anything extra is incidental, for example shared lifts, toilets and tea points with other occupiers would be seen as incidental.

An example of what HMRC consider to not be a supply of land

If a landlord lets office space and within the contract it states, and/or in reality it is the case that in return for a rental payment, there is a use of facilities, then this can quickly become a supply subject to VAT. For example, office space which includes secretarial services, photocopying, printing, mail sorting etc.

What do some recent cases suggest with regards to HMRC’s approach to this?

There have been some recent cases at the First Tier Tax Tribunal, which although are victories for the taxpayers, it shows HMRC’s appetite to argue that VAT is due on certain supplies of land.

Case A:

In the case of Errol Willy, the Tribunal decided that the rooms to let for two beauticians, who used the rooms for their business activities should be regarded as an exempt supply of land. This was despite HMRC arguing additional services such as receptionist services, the availability of a toilet and staffroom, and the display of a price list on the landlord’s website made it more than a passive supply of land and subject to VAT at 20%.

Case B:

There was also the case of Rufforth Park Limited, where the taxpayer organised a Sunday morning car boot sale, held in a field. There was no advance booking arrangement and sellers turned up on the day and paid their fee. The field also had toilet facilities and a café selling basic refreshments.

The taxpayer treated the fees as exempt from VAT as a passive land supply. However, HMRC claimed that the reputation of the event, the advertising of it, as well as the café and toilet facilities meant that the payments received should be standard rated. Again, the Tribunal confirmed that there was a single land supply which was exempt from VAT.

What should you be looking out for?

The above two cases do not set a precedent as they were heard at the First Tier Tax Tribunal. We also do not yet know if HMRC will challenge these decisions however, what this does show is that HMRC seem to be targeting this area.  

You may want to review contracts with tenants and analyse what is supplied, as well as reviewing pricing structures and how any extra services are invoiced.

It’s important to know that this is a ‘grey area’ and open to interpretation. If the VAT exemption position is taken, you should ensure that the decision is documented, for example it is held on file that advice has been sought to confirm the position.

It should also be ensured that contracts are worded appropriately to reflect the VAT position. This will put those that treat their supply of commercial property as VAT exempt in a more robust position, should HMRC come knocking.

How can we help?

If you would like to discuss the above matter or are looking for further guidance, please contact either VAT Partner Jas Dhillon (jaspaldhillon@lubbockfine.co.uk) or VAT Senior Manager Omid Motaleb (omidmotaleb@lubbockfine.co.uk).