The Practical Lawyer

Is money paid for a lock-out agreement VATable? Suppose you have a VAT-registered seller who exercises an option to tax over commercial property. He then enters into a lock-out agreement (ie a buyer pays him money, in return for an exclusivity period in being able to buy the property, with that money being put towards the purchase price if the buyer proceeds). In that situation you should give thought to the VAT implications. There are two possible arguments:

The VAT rate goes back to 17.5% on 1 January 2010, but can 15% be charged after that date? If the goods or services are supplied before 1 January, then 15% can be charged, even if the invoice is delivered after 1 January.

Earlier this year, the ECJ held that the letting of flats and the cleaning of common parts are separate supplies (even if both are supplied by L). In the view of the ECJ, the cleaning services will not fall within the concept of ‘letting of property’, and, since those activities can be separated from each other, they cannot be regarded as a single transaction. Thus, they are separate operations – and the cleaning cannot be regarded as an exempt supply of letting.

The general rule for cross-border business-to-business transactions is that the place of VAT supply is deemed to be where the supplier is. But, this is being reversed: from 1 January 2010, the general rule will be that the place of supply in a business-to-business context will be where the recipient is.

Normally the supply of residential house building, and the supply of building materials, will be zero-rated. But, there is an exception allowing the recovery of the VAT for a person who lawfully builds residential housing, provided they do not carry out those works in the course of business.

Many Ls will have to alter the VAT basis on which they invoice for cleaning, and other service charges.

The ECJ has held that the letting of flats, and the cleaning of common parts, are separate supplies (even when both are supplied by L). In its view, cleaning services do not fall within the concept of the ‘letting of property’ and, since those activities can be separated from each other, they cannot be regarded as a single transaction. In essence, therefore, they must be regarded as mutually divisible operations – so the cleaning cannot be regarded as an exempt supply of letting.

Do you need to charge VAT on your invoices to clients based outside the UK?

The answer is that you need to consider which jurisdiction your client belongs to and also, if they are in the EU, whether the client is acting in a non-business capacity:

if the client belongs outside the EU (including the UK and Isle of Man: you should not charge VAT;

For VAT purposes, the supply of car parking facilities is usually standard-rated, whereas the grant by a developer of a lease of more than 21 years of a residential flat will be zero-rated. Accordingly, if a residential lease includes the demise of a car-parking space then the whole transaction will be zero-rated.

What is the VAT situation when a freehold building is sold, comprising a retail ground floor, with a long-lease residential unit above?

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.