by Marc Selby
Of crucial importance to those making supplies of interests in land and property on which VAT is chargeable will be the tax point of those supplies. It is equally important to ascertain the tax point for supplies which are made to the taxpayer on which he will be charged VAT which he is entitled to reclaim.
The incidence of tax points on supplies on which VAT is chargeable (whether they be sales, rents under leases or developers’ “self-supplies”) can have significant cash-flow implications for those in the property industry where, typically, large sums of VAT will be charged on a few supplies which are made at infrequent intervals. Moreover, the “serious misdeclaration” penalty provisions in the Finance Act 1985 will become operative from December 31 1989, after which failure to ascertain the correct tax point for a particular transaction could lead to the submission of a VAT return with a “serious” underdeclaration, giving rise to a substantial penalty as well as liability for interest.
The tax point — or, as it is referred to in the Value Added Tax Act 1983 — the “time of supply”, determines, first, the rate of tax (which may be the standard rate of 15%, zero rate, or — if it is not a taxable supply — exempt) and second, in the case of taxable supplies, the time when the tax on supplies made by the taxpayer (“output tax”) must be accounted for and when tax on supplies made to the taxpayer (“input tax”) may be reclaimed. The first of these aspects has been canvassed in numerous learned articles and seminars (and also in a Customs & Excise press release) which focused property dealers’ and developers’ minds on the importance of effecting completion or prepayment on or before March 31 1989 on property transactions or construction services which would become standard rated after that date.
This article deals with the second aspect — the ascertainment of the correct tax point for the purpose of determining when output tax must be accounted for to HM Customs & Excise and input tax may be reclaimed — and considers the consequences which flow from it and some of the planning opportunities which are available.
All those who are registered for VAT are allocated accounting periods, which are usually at three-monthly intervals with the last day of each period falling at the end of a calendar month. The output tax which is chargeable on a supply made by a VAT-registered person must be accounted for within one month after the end of the accounting period in which the tax point for that supply occurs.
The “accounting” is effected by completing and submitting a VAT return together with the tax due to the VAT Central Unit at Southend. The return must show the total of all output tax on supplies made by and all input tax on supplies made to the registered person which have tax points in the accounting period to which the return relates. Only input tax which is attributable to taxable supplies made by the registered person is recoverable (so that, for example, no credit is available for VAT incurred on supplies for non-business purposes). The total of the output tax less the total of the input tax is the amount which must be paid to Customs within one month of the end of the accounting period, although an additional seven days grace is given to those who arrange payment by credit transfer. Where the input tax exceeds the output tax, the difference is repaid by Customs.
Failure to deliver either the return or the tax due within the prescribed time-limit can give rise to a default surcharge of 5% of the net tax due for the period (with a minimum penalty of £30) with subsequent defaults giving rise to fines at increased rates (the maximum being 30% of the net tax due). However, this penalty can only be imposed after the taxpayer has received a formal surcharge liability notice which is served if he is late on two occasions in any period of 12 months.
Even harsher than the default surcharge will be the serious misdeclaration penalty which will be implemented for VAT accounting periods commencing after December 31. This penalty will be imposed if, on a control visit, a customs officer discovers that the true liability for an accounting period has been underdeclared in a return by a sum which equals or exceeds:
(a) 30% of the true liability, or
(b) the greater of £10,000 or 5% of the true liability.
The penalty will also be imposed where there is an overclaim of input tax leading to a repayment of VAT by reference to the amount of tax which may be properly reclaimed.
The penalty will be avoided if the underdeclaration or overclaim is discovered and voluntarily disclosed to Customs before the control visit is made. Also, for both the default surcharge and the serious misdeclaration penalty there is a defence of “reasonable excuse”, which is, in practice, difficult (although not impossible) to establish. The legislation expressly provides that the following do not constitute reasonable excuse:
(a) insufficiency of funds to pay any tax which is due.
(b) the fact that reliance is placed upon another person (eg an accountant), or any dilatoriness or inaccuracy on that other person’s part.
In addition to the default surcharge and the serious misdeclaration penalty, tax paid late or underpaid (whether as a result of a “serious” misdeclaration or otherwise) will, with effect from December 31, bear interest at a rate to be prescribed by the Treasury.
The propensity for making “serious” underdeclarations is especially high for those making chargeable supplies of land and property where a single error can give rise to just such an underdeclaration. In the writer’s view, errors of this type are most likely to arise in practice from failure to ascertain correct tax points when completing returns — remember, the return must show the total output tax less the total input tax for all supplies which have tax points in the accounting period to which the return relates.
From a cash flow point of view, the best tax point for those making chargeable supplies, whether as vendors charging VAT on the sale price or as landlords charging VAT on rents, will be on the first day of the accounting period. The output tax which is chargeable on a supply having such a tax point does not have to be accounted for until one month after the end of the accounting period — some four months later (assuming a three-month accounting period). For those who are being charged VAT (whether as purchasers or tenants) which they will wish to recover, the ideal tax point will be on the last day of the accounting period, because the tax can be reclaimed or credited against output tax only one month later.
Below is an analysis of the tax point position for supplies by vendors to purchasers, by landlords to tenants and for developers making “self-supplies”. It is assumed for the purpose of this article that these supplies are those on which VAT is chargeable (although there will, in practice, be many cases where VAT is not chargeable, eg the sale of an “old” building by a vendor who has not opted to tax). As will be seen, the tax point is not necessarily synonymous with receipt of payment and it is possible for a tax point to arise — thereby triggering a liability to account for the tax — even if payment is received after the tax is due to Customs (or if it is never received at all!).
Vendors and purchasers
On sales of interests in land, the tax point will arise on the earlier of:
(a) payment of the purchase money, and
(b) the issue by the vendor to the purchaser of a VAT invoice
For a payment to create a tax point, it must be unconditional so that the receipt by the vendor’s solicitor of a deposit to be held as stakeholder or of money to be held to order will not amount to “payment” for this purpose. The receipt by the vendor’s solicitor of a deposit as agent will, however, establish a tax point at that time because the money is, in effect, being unconditionally released to the vendor.
The VAT (General) Regulations 1985 impose a statutory obligation on all those who are charging VAT to issue a VAT invoice (which must set out the particulars required by Regulation 13 of the General Regulations) to the person to whom the supply is made if he is a taxable person, ie he is or is required to be registered for VAT. The invoice must be issued within 30 days after the tax point. An invoice is not issued until it is handed over to the purchaser or tenant so that, for example, where there is a sale to a purchaser who is paying VAT and who is insisting upon receiving a VAT invoice when payment is made, it will be safe for the vendor to make out and send the VAT invoice to his solicitor on the basis that it will be handed over to the purchaser only upon receipt of the purchase money and completion. The issue of a VAT invoice to the purchaser prior to completion should, obviously, be avoided.
It should be noted that the issue of a VAT invoice can only establish a tax point in the case of a standard-rated supply and not in respect of a zero rated or exempt supply. This is of particular relevance in cases where it is still possible, under the transitional provisions in the Finance Act 1989, to zero rate certain supplies of (non-residential and non-charitable) interests in land and property.
In practice, the tax point on sales will generally arise upon completion because that is normally the time when the vendor hands over possession of the property to the purchaser and simultaneously receives unconditional payment. However, if the supply is of a freehold or long (ie more than 21 years) leasehold interest where the consideration is deferred to a date after completion or where there is no monetary consideration passing (eg an exchange without payment of equality money) then, assuming that no tax invoice has been issued, the tax point will arise on the date on which the purchaser or transferee acquires possession of the property, save that in such a case it will be possible to defer the tax point to the date of a tax invoice issued after completion provided that it is issued within 14 days of completion (or such longer period as Customs may allow).
Where a property is sold with the right for the vendor to receive further consideration conditionally upon the happening of an event (eg the purchaser obtaining planning permission) the tax point for the contingent part of the consideration will be the date on which the contingency is satisfied, assuming that a tax invoice for that part of the consideration is not issued before then.
If the purchase price includes a substantial sum of VAT, the vendor may prefer to agree a slightly later completion date if this will bring the tax point for the supply into the beginning of his next accounting period, thereby extending the time for accounting for the tax.
Landlords and tenants
Subject to limited exceptions, VAT will not be chargeable on rents payable under leases unless the landlord has opted to tax. If the option to tax has been exercised, the landlord must charge VAT on all sums which the tenant is obliged to pay under the lease, including service charges and insurance premiums as well as rent (although the obligation to charge VAT following the exercise of the election does not attach to certain zero rated supplies such as heating or lighting which the landlord might provide for a particular tenant’s exclusive benefit or to reimbursement of payments made on the tenant’s behalf, eg where the landlord discharges the tenant’s rates liability).
The tax point for supplies under leases will be earlier of:
(a) the receipt of payment, and
(b) the issue of a tax invoice
Where the rent is paid by cheque the payment is not “received” until the cheque is presented and met by the paying bank.
The objective from the landlord’s point of view should be, first, to ensure that a tax point is not established by the issue to the tenant of a tax invoice before the rent is received — hence, VAT inclusive rent and service charge demands should always be endorsed with the words “this is not a tax invoice”. Second, to obtain the most favourable cash flow, the rent days should be at the beginning of the landlord’s accounting periods. This can be most easily achieved on a new letting where the landlord can select the rent days which are to be incorporated into the lease. However, where the lease has already been granted with rent days falling at the end of the landlord’s accounting periods, all is not lost: the landlord can apply in writing to his local VAT office to change his tax periods to ones which more closely suit his requirements, although Customs has a discretion as to whether to allow such a change. Perhaps the most ideal solution is to incorporate into the lease a right for the landlord to change the rent days (remembering, of course, to deal with appointments) so that a purchaser of the landlord’s interest could, when he acquired the property, synchronise the rent days in line with his accounting periods.
A tenant who is paying VAT on rent which he will wish to reclaim as input tax will want the rent days to be as close as possible towards the end of his accounting periods so as to facilitate speedier recovery. If the rent days are unfavourable from his point of view he can apply to his local VAT office to change his accounting periods, subject to Customs’ discretion.
Developers making self-supplies
A self-supply charge will arise if, during the period beginning with the date on which construction of a (non-residential or non-charitable) building or civil engineering work is planned and ending 10 years after completion of the building or work, a person who is a “developer” in relation to the building or work either:
(a) makes an exempt grant in respect of the building or a work (eg grants a lease without opting to tax) — except where he intends to sell the freehold of the building or work within three years of the earlier of completion or full occupation or use, or
(b) occupies or uses the building or work for his own purposes when he is not fully taxableP>
The charge is restricted to the first occasion of the happening of any of the events mentioned in (a) or (b) above.
A “developer” means a person who orders or finances the building or work, as well as the person who constructs it, with a view to selling, leasing or licensing the building or work or occupying it for his own purposes.
The value of the self supply is the historic cost to the developer of all interests in the land in question which have been or will be acquired by him, (but excluding the value of any leases granted for a consideration in the form of rent the value of which cannot be ascertained when the charge arises), plus the VAT inclusive cost of all standard-rated construction supplies in relation to the building or work made to the developer. A charge arises only if the value of the supply is equal to or exceeds £100,000.
The tax point for the self-supply is deemed to be on the later of:
(a) the last day of the accounting period in which the developer first makes the relavant exempt grant or first occupies or uses the building or work as a non-fully taxable person, and
(b) the last day of the accounting period during which the building or work becomes substantially ready for occupation or use.
The tax point for a self-supply charge may therefore arise well after the event triggering the charge. For example, a developer who constructed a building for his own purposes and then occupies it for a business which is partially exempt will incur a self-supply charge, but if the occupation commences before the building is substantially complete the liability to account for the self-supply tax can be deferred by delaying completion. The legislation does not, however, give any guidance as to when a building becomes “substantially ready” for occupation.
For developers who do not intend to occupy or use the building or work, the simplest and safest way of avoiding a self-supply charge is to exercise the option to tax at the earliest possible moment, thereby ensuring that no exempt grant can be made which would trigger the charge.
Conclusion
The significance of tax points for those making or receiving chargeable supplies of interests in land and property should not be underestimated. The incidence of tax points on cash flow and the consequences of failing to ascertain correct tax points, or to account for the tax when due, mean that completion of VAT returns is a matter which must be afforded a high priority and careful monitoring.
