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Tax – VAT

Credit note – terms of trade

It is important to have correctly worded contractual terms when goods are supplied, subject to a retention of the title clause. In particular, there must be a clear entitlement to issue credit notes for VAT purposes if goods are repossessed. Failure to have such a clause can result in VAT being irrecoverable.

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Three-year cap – not pre-1997!

A three-year time limit on claims for deducting VAT input tax was introduced as from 1 May 1997. But, the HL has now held that these provisions were introduced without the required ‘reasonable transitional period’.

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Option to tax – new Sched 10

Important changes to the VAT option to tax on supplies of land come into effect on 1 June. Sched 10 (which details the option to tax) is being revised. Although much of the substance remains unchanged, there are important new provisions:

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Refunds – assignable

The CA has held that VAT refunds are assignable debts. A VAT refund from HMRC is a ‘chose in action’ that can therefore be assigned by the taxpayer (even though the legislation says the refund shall be made to the taxpayer).

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Option to tax – buildings or land?

Under the new option to tax regime (in force since 1 June) extra care is needed when describing what is covered by an option (ie building or land). The point to appreciate is that it is possible to regard an option to tax made on a building as ceasing to apply to the underlying land when the building is demolished.

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Option to tax – change to residential use

Under the old regime, a sale of a commercial building to a buyer who intended to convert it to residential use, or into a residential home, would mean that (unless the parties expressly agreed otherwise) the seller’s option to tax was disapplied, and thus the sale became an exempt supply.

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Option to tax – cooling-off period

Having opted to tax, a property owner may want to revoke that option if it turns out to be more advantageous to keep the property exempt (even though this means it will incur irrecoverable input tax). For example, by revoking the option, L may be able to obtain a higher rental return from a T with an exempt business (such as a bank). This will be beneficial if the increased rent will exceed the landlord’s irrecoverable VAT.

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Commercial buildings – new

The new edition of the Conveyancing Handbook has a useful checklist of the main points to consider when acting for the buyer on a freehold purchase of a new commercial building. In particular, if the contract requires the buyer to pay VAT, he will want to be certain that VAT is chargeable (and have evidence to establish whether or not there is a mandatory charge to VAT on a subsequent sale).

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Roof space – zero-rated

It has been held that the grant of lease following conversion of the empty roof space of a block of flats into a new self-contained flat will be zero-rated, because the roof space is a ‘non-residential’ part of the building.

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Housebuilder – letting stock

As the residential property market slows, it is becoming increasingly common for property developers to let out their newly completed properties whilst waiting for a recovery in property prices. Whilst this may be superficially attractive (because of the cashflow benefits), there are real VAT risks.

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