New VAT rate : guidance for landlords and sellers of commercial property

Temporary reduction in VAT standard rate

With effect from 1 December 2008, the standard rate of VAT will be reduced from 17.5% to 15%. This temporary reduction will remain in place until 31 December 2009, after which the standard rate will revert to 17.5%.

The reduced rate of 15% must be charged on sales of standard rated goods and services made on or after 1 December 2008. However, where payment has been received or a VAT invoice issued before 1 December 2008, the supplier can choose to apply the 15% rate, but they are not obliged to do so. These "special change of rate rules" may affect both leasehold and freehold properties.

Leasehold properties

In relation to leasehold properties, the special change of rate rules may apply as follows:

The landlord of a property that is subject to VAT at the standard rate issued an invoice for rent in advance on 1 September 2008, for the quarter from 29 September 2008 to 24 December 2008. The invoice charged VAT at the rate of 17.5%.

The landlord can now choose to apportion the quarter's rent and charge VAT at 17.5% from 29 September to 30 November 2008 and at the new rate of 15% from 1 December to 24 December 2008. The landlord would need to issue a credit note to the tenant within 45 days after 1 December 2008.

Where the tenant can recover the VAT, it is unlikely that the landlord would want to go to the administrative cost of applying the new rate. Tenants such as banks, who are unlikely to be unable to recover the VAT, may be keen to benefit from the reduced rate of 15%.

Freehold properties

In relation to sales of freehold properties, the tax point is usually the date of completion of the conveyance. An earlier tax point arises if a VAT invoice is issued before completion, or all (or part) of the purchase price is received before completion.

The special change of rate rules would apply where a VAT invoice has been issued, or payment received, before 1 December 2008, but completion does not take place until after 1 December 2008. The seller can choose to recalculate the VAT on the amount invoiced or paid at 15% and issue a credit note to the buyer.

Taxing exempt supplies of land

The PBR 2008 announces that, as part of its tax simplification measures, the Government intends to make it easier to tax otherwise exempt supplies of land and property from early 2009. There do not appear to be any further details relating to this announcement in the PBR 2008.

For further information please contact Elizabeth Jones