S&W Sessions are a regular series of thought provoking hot topic webinars that are relevant to your business.
In 2017, the government proposed widening the scope of taxation on UK property gains for non-residents, the cumulative effect means conventional ways to date of acquiring and holding UK commercial real estate need to be fundamentally reassessed. This webinar will provide a summary of the current landscape and also an update on the latest VAT issues in the property sector for developers and contractors.
The webinar will touch upon the following:
- The news rules on UK property gains for non-residents
- Who is affected and what reliefs are available?
- VAT issues in property and commercial issues for developers
- Changes for resident managing agents
- VAT liability of works post completion
- Review of “white goods” rules – are you incurring too much irrecoverable VAT?
- Reverse charge for the construction sector from 1st October
- Barter arrangements and the correct value for VAT purposes.
- How can we help?
Who should join?
- Any non UK resident with UK property
- Any commercial or residential developer and contractors
- From 6 April 2019, all non-UK resident persons will be taxable on gains on disposals of interests in any type of UK land
- Prior to this date only the disposal of UK residential property by non-residents was chargeable to tax following changes in April 2015
- The gain is chargeable to capital gains tax for individuals or corporate tax for non-UK resident corporate entities
- The rate of tax will be the same as for an equivalent disposal by a UK resident
- The taxable gain is limited to any increase in value arising from 6 April
- Time apportionment of total gain since acquisition can be used as an alternative
Indirect disposals by non-residents
Gains on disposals of 'closely held' indirect interests in 'property rich' entities will also be taxable from 6 April 2019
An entity will be 'property rich' if 75% or more of the value of the asset disposed of derives from UK property
For an interest to be considered 'closely held', it needs to be a holding of 25% or more
There is a separate regime, which will operate for 'property rich' collective investment vehicles ("CIV")
- UK Real Estate Investment Trusts ("REIT")
- Foreign equivalents of UK REITs;
- Collective Investment Schemes (as defined under FSMA 2000); and
- Alternative Investment Funds (as defined in regulation 3 SI 2013/1773).
Exempt investors - tax exempt investors, such as pension funds and sovereign wealth funds ("SWF") will be able to claim exemption from tax on any gains attributed to them
Trading exemption - 'property rich' companies will be exempt if all, or almost all, of the UK land being disposed of is being used in the course of a qualifying trade
Elections available to CIVs only
Transparency election - this enables CIVs which are currently 'transparent' for tax purposes in respect of income, but not gains, to elect irrevocably to be treated as a partnership for tax
Exemption election - this allows non-UK resident CIVs to be treated as being exempt on gains on disposals of interests in UK land
What do you need to do now?
- Obtain a valuation on all UK property held on 6 April 2019
- Can elect to take historical cost where this is greater than the 5 April 2019 valuation
- This election can be made after disposal
- For indirect disposals, if original cost basis creates a loss then it will not be an allowable loss
- HMRC will not necessarily require formal valuations but some evidence will be required in the event of enquiry
What will you need to do on disposal
The following events will be deemed to be a disposal:
Non-resident companies that make a disposal of UK immovable property will need to register for the corporation tax self assessment, within 3 months of the disposal
They will be required to submit a return for the applicable accounting period within 12 months of the end of the period, ie. the date of disposal
Payment of corporation tax will depend on the level of taxable profits and length of the accounting period and is likely to be 3 months and 14 days after the disposal
Rental income still taxed under self assessment for 2019/20 so two returns (CT and SA) required where gains have been made in this year
Future changes for non resident landlords
- From 6 April 2020, non-UK resident companies with a UK property business will be chargeable to corporation tax rather than income tax
- Corporate tax rate of 17% will also apply from this date
- Interests and finance charges will be treated as non-trade deficits
- Expenses relating to management of the company will be classified as 'management expenses'
- New corporation tax rules in relation to loss restriction and interest restriction will apply
- iXBRL accounts will need to be prepared to be filed alongside the corporation tax return
- Income tax losses are grandfathered so can be carried forward to the Corporate Tax regime
- These losses can be offset against future UK property business profits chargeable to Corporate Tax but no other types of income
- These losses cannot be group relieved
- Change from Income Tax to Corporation Tax will not be considered a disposal for capital allowances purposes
- Non-resident landlord scheme to still apply to offshore property companies
- Periods of account that straddle 6 April 2020 will be split into two separate periods of account on just and reasonable basis
- Other transitional provisions exist to ensure that income and expenses are only included once
Wrapping up - key takeaways
- From now on all non-UK resident persons will be taxable on gains on disposables of interests in any type of UK land
- From April 2020 non-resident landlords will be taxed under corporation tax
- Assess your position to make sure you are compliant with the new changes
- Speak to S&W
A Guide to VAT issues in the property sector with John Voyez
Changes for resident management agents
- September 2018 HMRC provided clarification for managing agents
- Many managing agents acting for landlords and resident companies had not been correctly charging VAT
- Issues with HMRC guidance and Extra Statutory Concession ESC 3.18 and incorrect rulings from HMRC officers
- Main problem area is recovery of salaries for employees of management company from landlords and failure to add VAT e.g. concierge, porter, caretaker etc.
- Only the residential service charge payable by a tenant to the landlord benefit from VAT exemption
- The charge made by a managing agent to the landlord for the agent's services, and recovery of own costs and third party costs is subject to VAT
- Ongoing discussion with HMRC regarding RMC's and RTM's
VAT liability of post completion works
- Any work carried out post completion of new residential development is subject to VAT (except snagging)
- Following Grenfeel disaster, questions have been raised regarding the VAT liability of works to replace cladding
- HMRC accept that provided the works are carried out by the original developer, zero rating may apply
- Basis for this is that the works rectify the problem are so material it is questionable whether the building would have been considered "complete" at the time of PC
- Possible to extend this principle to any material rectification works post completion
- May give rise to VAT savings for the developer (subject to insurance claim).
VAT on "white goods"
- There is a "block" on recovery of VAT incurred on "white goods" for developers
- HMRC's guidance not necessarily kept pace with modern design and development of residential accommodation regarding what is "ordinarily installed" in a residential apartment, especially mid to high end properties
- Developers should undertake a detailed review of the fit out spec to ensure VAT is only charged by contractors on "white goods".
- Also ensure contractors split out installation costs from the price of goods to maximise zero rating
- Contractors will always charge VAT on a conservative basis- there is nothing in it for them!
- For developers, every £1 of VAT charged impacts on bottom line profits
- Possible to make material savings
Reverse charge in the construction industry from 1st October
- HMRC have been consulting for some time on introducing the reverse charge to reduce the incidence of fraud
- A number of EU countries operate the reverse charge
- Each contractor in the supply chain will raise invoices, but not collect any VAT
- Each contractor receiving services from a sub contractor accounts for the VAT by making appropriate entries in their VAT return
- Results is that it reduces the significant amount of VAT monies in the system potentially subject to fraud
- Only the final lead contractor will issue a VAT invoice in the normal way to the "end user"
- End user needs to certify status
- Number of issues arising and HMRC continue to consult on the detail and guidance notes
- Make sure your IT systems are set up correctly
- There is no such thing as a straight forward property transaction
- Often involve an element of barter between Seller and Buyer
- Example - Seller takes reduced consideration from Buyer on basis that Buyer will develop site and hand back long leasehold interest over ground floor retail Seller.
- Example - Land swaps between parties with balancing consideration passing
- For VAT purposes there are two transactions to be recognised in opposite direction - by Seller to Buyer, and Buyer to Seller
- VAT is due on the full value of each transaction
- If not correctly recognised may lead to a loss of VAT to HMRC
Wrapping up - Key takeaways
- Think oblique, plan ahead- it's not just 0%, 5%, 20%
- Identify irrecoverable VAT and insure it's budgeted for!
- Are you correctly account for VAT?
- Reverse charge
- Barter arrangements
- Speak to S&W
Register for the next S&W Session