Property alert – The latest on Making Tax Digital (MTD)!
It’s now only five months until the introduction of MTD – the use of compatible software to capture business transactions, prepare VAT returns, and send and receive information with HMRC via an Application Programming Interface (API)-enabled software. Are you ready?
HMRC has made some announcements since our first update on this subject in August 2018 and has also expanded the list of approved software providers to more than 60. Click here for the full list of current, approved providers.
The HMRC announcement of greatest interest to the property sector is the delay in the implementation date for members of a VAT group. It has been deferred by 6 months to 1 October 2019.
You will also be seeing far more communication about MTD. HMRC has announced they will be writing to businesses affected by MTD. They will also be launching an advertising campaign in an attempt to make sure all businesses are aware of the changes and are making the necessary changes.
One aim of introducing MTD is to reduce human error. There is no doubt that HMRC will look to use the additional data they get via MTD to increase the use of automated checks in order to help them identify common errors. Therefore, a key element of MTD is making sure that those responsible for the accounting records correctly record VAT on all transactions.
In our August update we summarised some of the most common errors our VAT team find when preparing VAT returns. We set out below five further tips and recommendations from our team, focusing on those issues affecting the property sector.
1. VAT TREATMENT OF LAND-RELATED SERVICES
Unlike most services, “land-related services” are generally taxed not by reference to where the customer is based but rather where the land is located. This means that UK-based professionals (e.g. architects, surveyors and property managers) are required to charge UK VAT on their services, even if the invoices are addressed to customers based overseas. It’s also not always simple to identify what exactly a “land-related service” is.
While the link between an architect designing a building and “land” is clear, the link between some of the other services seen by HMRC as “land-related” (e.g. a company taking pictures of houses for an estate agent) is less obvious. Those providing services which do not appear to be land-related (such as the preparation of tax returns) need to take additional care, as the appointment of a UK managing agent by the investor can also affect the VAT position.
Overseas property owners with a UK managing agent
HMRC has long taken the view that an overseas property owner with a UK managing agent has an “establishment” in the UK for VAT purposes. This means that, where non-resident owners are being charged for services that are not land-related (perhaps accountancy or tax services), HMRC considers these services are being provided to a UK resident customer and are therefore subject to VAT.
A Tribunal decision last year means that costs such as electronic property searches undertaken by lawyers are deemed to be an integral part of the service provided by the lawyers. When included in an invoice where the legal fees are subject to VAT, they also become subject to VAT at 20%.
Where a property deal includes an amount to be paid as overage, and the supply is subject to standard rate VAT, the tax point applicable to the overage depends on how it is calculated. If the actual amount of overage is not known (or is “uncertain”) when the property is sold, the VAT liability on this payment does not crystallise until the actual amount of overage can be quantified. However, if the overage amount is certain at the date of the contract (admittedly, unusual), the VAT liability crystallises at the date of the contract, which may result in VAT being payable by the vendor before they have received the consideration.
4. INTERCOMPANY TRANSACTIONS/CHARGES
Overlooking the need to charge VAT on intercompany transactions and recharges is a common mistake, particularly where those costs are not physically paid. This may occur when they are charged to an intercompany loan account or where they are a share of internal group costs, e.g. salary or internal IT costs. It is important to remember that, unless the companies are in a VAT group, almost any intercompany charge will be subject to VAT, even if there is no profit element in the charge. A VAT liability does not require physical payment or an invoice to be raised but there is a series of other triggers which can create a VAT tax point.
5. COMPENSATION PAYMENTS
The VAT treatment of compensation payments, particularly those made by developers, is a complex area where VAT errors are common. Many compensation payments are VAT free but this treatment is not universal. Describing something as “compensation” in an agreement does not guarantee VAT is not payable. One of the most common errors relates to payments where the person receiving the “compensation” is also making a “supply”.
A payment by a developer to an adjoining business for disturbance and loss of profits is probably compensation and not subject to VAT. However, if the payment also grants the developer the right to park vehicles on the adjoining business’s property, or gives the developer the right to cross the adjoining property, the payment may be subject to VAT. One solution is to draw up separate contracts for the two elements of the payment.
Here to help
If any of this raises concern or you would like to speak to a property industry expert, please contact your partner at Kingston Smith or a member of our property team who will be happy to help.