For farming businesses, land and buildings owned are often the most valuable assets on the balance sheet. When ownership changes, either through a sale, gift or part of a restructuring process, VAT should be considered at the earliest possible stage.
There are two key points to consider, the first is whether VAT should be charged on the transfer. While the sale of land or buildings is generally VAT exempt, in some cases it can be standard rated, with VAT payable. This most commonly occurs where the land or buildings are opted to tax or a non-residential building is new (completed within the last three years).
When opted land or a new building is sold it will generally be obvious that VAT is due. However, less obviously, VAT can also be chargeable on non-sale transactions, such as gifts. This can be the case where VAT has been reclaimed on the purchase of the land or the construction of a building on the land. Where the building is new or there is an option to tax in place, there would be what is called a ‘deemed supply’ and VAT would be payable on essentially the open market value at the time of transfer.
If VAT has been charged on rental income this may indicate an option to tax has been made but it is not conclusive. The existence or otherwise of an option to tax should be confirmed. The option to tax is specific to the business that makes it and does not travel with property. HMRC may confirm if they have a record of an option to tax, but this is not guaranteed.
Where VAT is charged on a sale it may be possible for the buyer to reclaim any VAT charged, however Stamp Duty Land Tax (SDLT) would be paid on the VAT inclusive selling price, so charging VAT can increase the SDLT cost. In some cases, it may be possible to structure a transfer so that no VAT is charged even if land is opted - for example, where the land and buildings transfer as part of a business that the new owner will continue to operate. This does require certain steps to be taken so needs to be planned early.
VAT free treatment of a sale or transfer would not only potentially reduce the SDLT payable, perhaps sweetening a deal, it would also avoid trying to reclaim the VAT paid from HMRC. This is becoming an increasingly slow and tiresome administrative burden to be avoided if possible.
The second key area – often more problematic if not identified and addressed prior to a sale or transfer - is the Capital Goods Scheme (CGS).
Where VAT has been reclaimed on a high value capital asset, which includes land or the construction or refurbishment of buildings, the initial VAT deduction must be adjusted to reflect future changes in use of the asset. The current value for an asset to fall within the scheme is £250,000 of VAT bearing cost. The adjustment period is normally 9-10 years.
By way of example, assume a business constructed an agricultural building costing £350,000 and reclaimed all the £70,000 VAT incurred on the basis the building would be used wholly for taxable business purposes. After five years the barn was sold, without an option to tax being made so the sale would be exempt. Because the exempt disposal occurs roughly halfway through the CGS adjustment period, the business would typically have to repay around half of the VAT originally reclaimed on the construction.
This VAT repayment cannot be reclaimed by the buyer and once the exempt sale has been completed there is no way of mitigating or reversing this charge. For that reason, VAT due diligence on land and buildings should cover not only whether VAT is chargeable on the transfer, but also whether CGS adjustments could be triggered. Identifying the position early gives you the best chance to consider alternative structures, obtain the right evidence, and avoid preventable VAT and SDLT costs.
