Guidance

Land and property (VAT Notice 742)

Find out when transactions involving land and buildings are exempt from VAT.

• From: HM Revenue & Customs
• Published: 29 May 2012
• Last updated: 31 December 2020 — See all updates

Details

This notice cancels and replaces Notice 742 (March 2002). Details of the main changes to the previous version can be found in paragraph 1.2.

1. Overview

1.1 What this notice is about

This notice explains when transactions involving land and buildings are exempt from VAT. You might also need to check Opting to tax land and buildings (VAT Notice 742A).

The land law in Scotland differs in many ways from that in England and Wales. Scottish land law terms (VAT Notice 742/3) may help you to understand these differences.

1.2 What’s changed

This notice has been updated to reflect legislative changes that temporarily introduce a 5% reduced rate on supplies of hotel accommodation, holiday accommodation, seasonal pitches for caravans including supplies of facilities provided in relation to the pitches and pitches for tents including supplies of facilities provided in connection with the occupation of the pitches.

All references in this notice to ‘temporarily reduced rated’ or ‘temporary reduced rate’ are to supplies made between 15 July 2020 to 31 March 2021.

1.3 Who should read this notice

You should read this notice if you make, or intend to make, supplies of any interest in land, buildings or civil engineering works.

1.4 The law covering this notice cover

Section 31 of the VAT Act 1994 holds that goods and services specified in Schedule 9 to the Act are exempt supplies. Schedule 9, Group 1 specifies those supplies of land and buildings that are exempt from VAT and those that are excluded from the exemption.

Section 29A of the VAT Act 1994 holds that goods and services specified in Schedule 7A to the Act are reduced rate supplies. By virtue of The Value Added Tax (Reduced Rate) (Hospitality and Tourism) (Coronavirus ) Order 2020, Schedule 7A, Group 15 specifies any supply which, because it falls within paragraph (d), (e) so far as the supply consists of the grant of a license to occupy holiday accommodation, (f) or (g) of Item 1 (Land) in Schedule 9, is not an exempt supply by virtue of that Item. As such, some supplies which are normally standard rated as not being included within the exemption will be reduced rated during the period to which the temporary reduced rate applies.

2. Supplies of land

2.1 What constitutes land

For the purposes of VAT, the term land includes any buildings, civil engineering works, walls, trees, plants and any other structure or natural object in, under or over it as long as they remain attached to it.

2.2 How to make a supply of land

You make a supply of land by making a grant of an interest in, right over or licence to occupy land in return for a payment or consideration. If you make free supplies of land you should read paragraph 7.6. A grant includes an assignment or surrender.

A grant is the sale of a freehold or other interest, or the creation of a lease or a letting of land. An assignment is the transfer of a lease by an existing tenant to a new tenant. A surrender is giving up an interest in land to the person who granted it to you. More information on surrenders can be found in paragraph 10.3 and 10.4.

2.3 Interest in land

An interest in land can be legal or beneficial:

An interest in land can be a	which is the
legal interest	formal ownership of an interest in or right over land, such as a freehold or leasehold interest
beneficial interest	right to receive the benefit of any supplies made of the land, such as sale proceeds or rental income. A beneficial interest can be held and transferred separately from the legal interest in the land.

2.4 Rights over land

Rights over land include	which include
rights of entry	allow an authorised person or authority to enter land. For example you might allow someone to come onto your land to perform a specific task.
easements	grant the owner of neighbouring land a right to make their property better or more convenient, such as a right of way or right of light.
wayleaves	are a right of way to transport minerals extracted from land over another’s land, or to lay pipes or cables over or under another’s land.
profits à prendre	are rights to take produce from another’s land, such as to extract minerals.

UK law currently exempts the supply of rights over land. But these are often supplied together with freehold or leasehold interests in land and form part of a single supply. For example, a lease may be granted of a single floor in an office block with an easement over the common areas, such as reception and lifts, to allow the lessee to access his floor. In such cases the supply of the right over land (in this case the easement) will share the same tax treatment as the principal supply.

Some profits à prendre, such as the right to fell and remove timber, are standard-rated under the exceptions to exemption in UK law, see section 3 for further information. In addition, the right granted to harvest and remove crops may in some cases be treated as a zero-rated supply of food or animal feed stuff. See Food products (VAT Notice 701/14) and Animals and animal food (VAT Notice 701/15).

2.5 A licence to occupy land

For a licence to occupy to exist, the agreement has to have all characteristics of a ‘leasing or letting of immovable property’. This is the case if the licensee is granted right of occupation of a defined area of land (land includes buildings, see paragraph 2.1), for an agreed duration in return for payment, and has the right to occupy that area as owner and to exclude others from enjoying that right.

All of these characteristics must be present.

Where a licence to occupy is granted together with other goods and services as part of a single supply, the nature of the overarching supply will determine how it should be categorised for VAT purposes.

For examples of supplies that are licences to occupy land see paragraph 2.6.

For examples of supplies that are not licences to occupy see paragraph 2.7.

2.6 Examples of supplies that are licences to occupy land

The following are examples of licences to occupy land. This list is not exhaustive:

• the provision of a specific area of office accommodation, such as a bay, room or floor, together with the right to use shared areas such as reception, lifts, restaurant, rest rooms, leisure facilities and so on
• the provision of a serviced office but only where the use of phones, computer systems, photocopiers is incidental to the provision of office space
• granting a concession to operate a shop within a shop, where the concessionaire is granted a defined area from which to sell their goods or services
• granting space to erect advertising hoardings
• granting space to place a fixed kiosk on a specified site, such as a newspaper kiosk or flower stand at a railway station
• hiring out a hall or other accommodation for meetings or parties and so on (but not wedding or party facilities where the supplier does more than supplying accommodation, for example by assisting with entertainment and arranging catering), the use of a kitchen area, lighting and furniture can be included
• granting a catering concession, where the caterer is granted a licence to occupy a specific kitchen and restaurant area, even if the grant includes use of kitchen or catering equipment
• granting traders a pitch in a market or at a car boot sale
• granting a specific space for the installation of a ‘hole in the wall’ cash machine (ATM)

2.7 Examples of supplies that are not licences to occupy land

The following are examples of supplies that are not licences to occupy land:

• the rental by a hairdressing salon of chair spaces to individual stylists, unless a clearly demarcated area is provided (such as a floor or whole salon) and no other services
• the hire of tables in nail bars to self employed manicurists
• providing another person with access to office premises to make use of facilities, such as remote sales staff away from home having access to photocopiers and the like at another office
• allowing the public to tip rubbish on your land
• storing someone’s goods in a warehouse without allocating any specific area for them
• granting of an ambulatory concession, such as an ice cream van on the sea front or a hamburger van at a football match
• allowing the public admission to premises or events, such as theatres, historic houses, swimming pools and spectator sports events
• wedding facilities (including, for example, use of rooms for a ceremony, wedding breakfast and evening party)
• hiring out safes to store valuables
• granting someone the right to place a free standing or wall mounted vending or gaming machine on your premises, where the location is not specified in the agreement

3. The liability of a supply of land

3.1 The VAT liability of a supply of land

The grant, assignment or surrender of an interest in, right over or licence to occupy land is normally exempt from VAT. There are exceptions to this general exemption:

Description	Liability and further information
Freehold sale or long lease in new dwellings, communal residential or relevant charitable buildings by the person constructing	generally zero-rated see Buildings and construction (VAT Notice 708)
Freehold sale of other types of new or partly completed buildings (for example shops)	see paragraph 3.2
Freehold sale of new or partly completed civil engineering works	see paragraph 3.3
Sale of land and buildings as part of a transfer of a going concern	not a supply for VAT purposes see Transfer a business as a going concern (VAT Notice 700/9)
Parking	see section 4
Letting of facilities for sport and physical recreation	see section 5
Sporting rights	see section 6
Hotel and holiday accommodation	standard-rated (or temporarily reduced rated) see Hotels, holiday accommodation (VAT Notice 709/3)
Pitches for caravans on seasonal sites	standard-rated (or temporarily reduced rated) see Caravans and houseboats (VAT Notice 701/20)
Pitches for tents or camping facilities	standard-rated (or temporarily reduced rated) see Caravans and houseboats (VAT Notice 701/20)
The right to fell and remove timber	standard-rated if you sell land that contains standing timber your supply is of exempt land
Leasing and letting of moorings	generally standard-rated moorings for houseboats may qualify for exemption, see Caravans and houseboats (VAT Notice 701/20) if the mooring charge is for a qualifying ship the supply may be zero-rated, see Ships, aircraft and associated services (VAT Notice 744C) a qualifying ship is a ship of a gross tonnage of not less than 15 tonnes which is neither designed nor adapted for use for recreation or pleasure
Viewing accommodation	see paragraph 3.4

You can opt to tax land (including buildings). Once you have opted to tax any supplies you make of the opted land will normally be standard-rated. Read Opting to tax land and buildings (VAT Notice 742A) for more information.

3.2 Freehold sales of new or part completed commercial buildings

If you sell the freehold of a new, or partly completed, commercial building your supply is standard-rated unless it qualifies to be treated as part of a transfer of a going concern, see Transfer a business as a going concern (VAT Notice 700/9).

For the purposes of this paragraph a commercial building is any building that is not designed as a dwelling or number of dwellings nor intended for use solely for relevant residential or relevant charitable purposes. For the meaning of these terms, see Buildings and construction (VAT Notice 708). Examples of commercial buildings are shops, factories, warehouses and offices.

A building is new for 3 years from the date that it’s completed. The date of completion is the date the certificate of practical completion is issued, or the date the building is fully occupied, whichever happens first. All freehold sales that take place within the 3-year period are standard-rated. But leasehold sales are exempt (subject to the option to tax, see Opting to tax land and buildings (VAT Notice 742A).

3.3 Freehold sales of new or part completed civil engineering works

If you sell the freehold of a new or, partly completed, civil engineering work your supply is standard-rated unless it qualifies to be treated as part of a transfer of a going concern, see Transfer a business as a going concern (VAT Notice 700/9). Examples of civil engineering works are roads, bridges, airfields, oil refineries and pipes used for mains services. A civil engineering work is new for 3 years from the date it is completed. The date of completion is the date the certificate of completion is issued by an engineer, or the date it is first fully used, whichever happens first. All freehold sales that take place within the 3-year period are standard-rated.

If you sell the freehold of some bare land, but that land is ancillary to new or part completed civil engineering works, such as an airfield or oil refinery, you are making a single standard-rated supply.

If you sell the freehold of land containing new civil engineering works but those works are a minor part of the supply, you are making a supply of exempt land (unless you have opted to tax). An example of this is the sale of a development site on which you have built roads and laid pipes for drainage. It would also be the case where you sell individual building plots on which connections to mains services have been constructed. The services of constructing civil engineering works might be zero-rated if in the course of construction of a new dwelling. See Buildings and construction (VAT Notice 708).

3.4 Viewing accommodation

If you grant viewing accommodation, such as boxes at a sports ground, theatre, concert hall or other place of entertainment, your supply is excluded from exemption and standard-rated. This includes any accommodation that is intended for use by individuals or groups for viewing a sporting event, show or other form of entertainment, regardless of whether the entertainment is actually in progress when the accommodation is used. If you let an entire theatre, concert hall or other place of entertainment your supply is normally exempt, unless you have opted to tax.

4. Parking

4.1 The basic VAT position

If you provide facilities for parking vehicles your supply will normally be standard-rated. There are exceptions to this general rule. This section will help you decide the liability of your supplies.

4.2 When to make a standard-rated supply of parking facilities

If you make a grant of the right to use facilities which are either designed for parking vehicles or provided specifically for that purpose your supply is standard-rated except in the circumstances described in paragraph 4.4 and 4.5. The following are examples of standard-rated supplies of parking facilities:

• a letting or licence of a garage or designated parking bay or space, the letting is standard-rated even if the facilities are not used for storing a vehicle (unless the lease or licence specifically prohibits the use of facilities for parking)
• a right to park vehicles (including trailers) in, for example, a car park or commercial garage
• a letting or licence of land specifically for the construction of a garage, or for use solely for parking a vehicle
• a letting or licence of a purpose built car park, for example, a car park let to a car park operator
• a letting of a taxi rank
• the provision of storage for bicycles
• the provision of storage (or parking) for touring caravans
• a freehold sale of a new or partly completed garage, car park or car parking facility other than in conjunction with the sale of a new dwelling (see paragraph 4.4). A garage or car park is new’ for 3 years following the date on which it was completed (see paragraph 3.2 and 3.3 for further details)

4.3 When a supply is of land rather than parking facilities

If you grant an interest in, right over or licence to occupy land in the following circumstances, your supply will be exempt, unless you have opted to tax:

• letting of land or buildings (but not garages, designated parking bays or other facilities specifically designed for parking) where the conveyance or contract makes no specific reference to use for parking vehicles
• letting of land or buildings where any reference to parking a vehicle is incidental to the main use
• letting of land or buildings to a motor dealer for storing stock-in trade
• letting of land or buildings to a vehicle transportation firm, to a vehicle distributor or to a vehicle auctioneer for use in the course of their business
• letting of land, including land used at other times as a car park, for purposes such as holding a market or a car boot sale (this also includes the charge to the car owners selling their goods at a car boot sale)
• letting of land for the exhibition of vehicles
• letting of land to a travelling fair or circus (and the incidental parking of vehicles)
• the freehold sale of garages, car parks or car parking facilities that are not new (more than 3 years have elapsed from the date on which they were completed, see paragraphs 3.2 and 3.3 for further information)

4.4 Grants of parking facilities with dwellings

4.4.1 Parking supplied together with the zero-rated sale or long lease of a new dwelling

If you’re making a zero-rated sale or long lease of a building designed as a dwelling or number of dwellings (see Buildings and construction (VAT Notice 708)) and you supply a garage or other parking facility to the purchaser of the dwelling, you can zero rate the garage or other parking facility if both:

• the garage or parking facility is reasonably close to the dwelling
• it’s intended to be used in conjunction with the dwelling

Garages are also treated as part of a zero-rated dwelling if constructed at the same time (or converted from a non-residential building at the same time) and intended to be occupied with the dwelling (see Buildings and construction (VAT Notice 708)).

But zero rating can only apply to the extent that the consideration is in the form of a premium or first payment of rent for the sale or long lease of the dwelling and parking.

4.4.2 Parking supplied (under a major interest grant) after the zero-rated sale or long lease of a new dwelling

The first sale or long lease of a garage or other parking facility is zero-rated if the garage or parking facility is within the site of a building designed as a dwelling or number of dwellings and the grant is made by the same person that constructed the dwelling. This may happen, for example, if a developer sells a long lease of a flat to an individual who decides several months later to purchase a long lease in a parking space within the site of the block of flats from the same developer. In the case of a long lease, zero rating only applies to the extent that consideration is in the form of a premium or first rental payment for the parking space.

4.4.3 Letting of parking facilities to owners of dwellings

The VAT treatment of the letting of parking facilities to owners of dwellings will depend on the arrangements. But the following general principles apply:

1. Where the freehold of a dwelling has been purchased and a licence or letting agreement for parking facilities is granted at a later date under a separate contract or agreement, supplies under the licence agreement are standard-rated. This is because there are no periodic supplies of domestic accommodation with which to associate the supplies of parking facilities.

2. Where a leasehold of a dwelling has been purchased in return for a premium and the use of parking facilities are granted at a later date under a separate contract or agreement, the supplies of the parking facilities are normally standard-rated. But the supplies may be exempt where 3 applies (see also paragraph 4.4.2 where the parking is subject to a separate major interest grant).

3. Where the dwelling has been purchased under an agreement which includes either:

• the provision of parking facilities (even though these are only to be made available at a later date)
• an obligation on the tenant to accept a later grant of parking facilities (where they become available)

In return for a periodic rent or licence fee payable to the same landlord, the supplies of the parking facilities are exempt as long as both:

• the garage or parking facility is reasonably close to the dwelling
• it’s intended to be used in conjunction with the dwelling

The above does not apply to the provision of parking in conjunction with holiday accommodation. This is normally standard-rated, see Buildings and construction (VAT Notice 708).

For guidance on shared ownership arrangements, see paragraph 4.4.4.

4.4.4 Letting of parking facilities in conjunction with the letting of dwellings

The letting of garages or parking spaces in conjunction with the letting of dwellings for permanent residential use (under shorthold tenancy agreements or similar) is exempt providing that both the:

• garage or parking space is reasonably near to the dwelling
• tenant takes up both the lease of the dwelling and the lease of the garage or parking space from the same landlord

In some cases the dwelling and parking facilities can be the subject of separate letting agreements entered into at separate times. This can occur, for example, where an existing tenant agrees to rent a garage. In such circumstances the supplies of the dwelling and parking facilities can still be treated as single exempt supplies of domestic accommodation as long as there are periodic rental payments (supplies) being made in respect of the dwelling to which the parking supplies can be associated and the:

• garage or parking space is reasonably near to the dwelling
• tenant takes up both the lease of the dwelling and the lease of the garage or parking space from the same landlord

The position above contrasts with that applicable where leases have been purchased in return for premiums and periodic rents are not payable.

The position above applies to shared ownership properties as long as the purchaser continues to pay rent for the remaining share in the property.

Where parking facilities are supplied in conjunction with holiday accommodation the supply is normally standard-rated (see Buildings and construction (VAT Notice 708) for more information).

4.5 Grants of parking facilities with commercial premises

The same general principles set out in paragraph 4.4.3 and 4.4.4 apply to commercial premises.

If you grant a lease in commercial premises under an agreement that includes the provision of parking facilities, this is treated as a single supply (the parking has the same VAT liability as the commercial premises) as long as both:

• the parking is within or on the premises, reasonably close, or within a complex (for example, an industrial park made up of separate units with a ‘communal’ car park for the use of tenants of the units and their visitors)
• it’s intended to be used in conjunction with the commercial premises

The same treatment applies where the agreement for the lease of the premises includes an obligation on the tenant to accept a later grant of parking facilities if or when they become available.

This means that if the rents from the commercial premises are exempt from VAT, the parking facilities will also be exempt.

In other circumstances the provision of parking facilities in conjunction with the letting of commercial property will normally be a separate standard-rated supply.

Where the agreements allow the actual number of parking spaces to be varied from year to year this will not normally affect the position of the parking facilities as part of a single supply of the commercial premises.

4.6 Grants of garages and parking spaces at caravan parks

If you supply a garage or parking facility at a seasonal or holiday caravan park your supply is always standard-rated.

If you supply a garage in conjunction with the sale of a new caravan your supply is standard-rated.

If you supply a garage or parking space in conjunction with the supply of a permanent residential caravan pitch your supply is exempt as long as both:

• you retain ownership of the land on which the garage or parking space is sited
• the garage or parking space is reasonably close to the caravan pitch

4.7 Moorings and parking facilities for houseboats

If you supply a mooring for a houseboat of a type described in Caravans and houseboats (VAT Notice 701/20) your supply is exempt. If you supply a mooring and garage or parking space to a houseboat owner your supply of the garage or parking space is also exempt providing it is reasonably close to the mooring.

5. Sports facilities and physical recreation

5.1 The basic VAT position

If you let facilities for playing any sport or for taking part in any physical recreation your supply is normally standard-rated. But, if the let is for over 24 hours or is for a series of sessions your supply may be exempt. See paragraph 5.3 and 5.4 for more details. If you are a sports club or a non-profit making body you should read Sport supplies that are VAT exempt (VAT Notice 701/45).

5.2 A sports facility

Premises are sports facilities if they’re designed or adapted for playing any sport or taking part in any physical recreation, such as swimming pools, football pitches, dance studios and skating rinks.

Each court or pitch (or lane in the case of bowling alley, curling rink or swimming pool) is a separate sports facility.

General purpose halls, such as village or church halls, which merely have floor markings are not themselves classed as sports facilities and the letting of such halls is exempt even when let for playing a sport. Similarly, school halls or similar (but not gymnasiums) are treated as exempt providing it is the bare hall that is provided. But if equipment such as racquets and nets are provided along with the hall the supply is of standard-rated sports facilities.

5.3 Lets for over 24 hours

If you make a single let of sports or physical recreation facilities for a continuous period of over 24 hours to the same person your supply is exempt, unless you have opted to tax. But the person that you let the facilities to must have exclusive control of them throughout the letting period.

5.4 Lets for a series of sessions

If you let out sports and physical recreation facilities for a series of sessions your supply is exempt (unless you have opted to tax) when you meet all the following conditions:

Step	Condition
1.	the series consists of 10 or more sessions.
2.	each session is for the same sport or activity.
3.	each session is in the same place. This condition is still met where a different pitch, court or lane is used (or a different number of pitches, courts or lanes), as long as these are at the same establishment.
4.	the interval between each session is at least 1 day but not more than 14 days (for an interval to be at least 1 day, 24 hours must elapse between the start of each session). The duration of the sessions may be varied. There is no exception for intervals greater than 14 days through the closure of the facility for any reason.
5.	the series is to be paid for as a whole and there is written evidence to the fact. This must include evidence that payment is to be made in full whether or not the right to use the facility for any specific session is actually exercised. Provision for a refund given by the provider in the event of the unforeseen non-availability of their facility would not affect this condition.
6.	the facilities are let out to a school, club, association or an organisation representing affiliated clubs or constituent associations, such as a local league.
7.	the person that the facilities are let to has exclusive use of them during the sessions.

6. Sporting rights

6.1 What sporting rights are

A sporting right is the right to take game or fish from land. The supply of sporting rights is normally standard-rated.

If the sporting rights form part of the supply of some land, there are occasions when the liability of the sporting rights will follow the liability of that land. See paragraph 6.2 for more information.

6.2 Sporting rights forming part of a supply of land

If you sell sporting rights as part of the freehold sale of the land over which those rights may be exercised, your supply will be exempt unless you have opted to tax.

If you lease land together with sporting rights over that land, and the sporting rights represent no more than 10% of the value of the whole supply, your supply will be of exempt land unless you have opted to tax.

If the sporting rights represent more than 10% of the value of the whole supply, you are making a standard-rated supply of those rights in addition to the lease of the land. You must apportion your charge fairly and reasonably between the sporting rights and the land.

6.3 Supplies relating specifically to shooting

6.3.1 Shooting in hand

The term shooting in hand is used where a landowner keeps control of a shoot, makes all the necessary arrangements to stock the land with game and decides who participates in a shoot.

If you accept contributions towards the cost of maintaining a shoot from other guns you invite to a shoot, you are not making a supply in the course of any business when all the following conditions are met:

Step	Condition
1.	Only friends and relatives shoot with you
2.	You do not publicly advertise the shooting
3.	Your shooting accounts show an annual loss at least equal to the usual contribution made by a ‘gun’ over a year
4.	The loss is not borne by any business but by you personally

In these circumstances you must not charge VAT to the ‘guns’ and you cannot recover as input tax any VAT that you incur in maintaining the shoot.

6.3.2 Shooting syndicates

If you set up a syndicate for individuals to contribute towards sharing the expenses of shooting, the syndicate does not normally make a supply of sporting rights to its members.

But if the syndicate is regularly paid to provide shooting facilities to individuals who are not members, or it makes taxable supplies of other goods or services, then it’s in business. The syndicate must, if VAT registrable, account for VAT on all its supplies including those to its members.

6.3.3 Landowners as syndicate members

If you’re a landowner or a tenant, and you grant shooting rights for less than their normal value to a syndicate of whom you’re a member, you must account for VAT on the full value of those rights. If you supply other goods or services, such as the services of a gamekeeper or beater, you should charge VAT in the normal way.

6.4 Supplies relating specifically to fishing

6.4.1 Still-water fisheries

If you operate a still-water fishery, the charges you make are standard-rated even if you supply both fishing rights and fish.

But the separate charge is zero-rated as a supply of those fish if:

• you allow a person to choose whether to take away fish caught or to throw them back into the water
• you make a separate charge solely for those fish taken away
• the fish taken away are of a species generally used for food in the UK (see Food products (VAT Notice 701/14))

6.4.2 Lakes

If you let a lake that is empty of fish to a person who will stock it with fish, you’re supplying the lake and not the right to take those fish. You’re making an exempt supply of land, unless you have opted to tax.

7. Other land transactions

7.1 Beneficial owners of land or buildings

For VAT purposes, a beneficial owner who directly receives the benefit of the proceeds from selling, leasing or letting land or buildings is treated as being the person selling, leasing or letting the land or buildings. This is the case even though that person is not the legal owner. An example of this is a bare trust where a trustee is the legal owner of the land, but the beneficial ownership belongs to another person. The beneficial owner is treated as the person making the grant.

If the beneficial owner is making taxable supplies above the registration threshold they will have to register for VAT. They will then need to account for the VAT due on the supply and can claim any input tax that arises, subject to the normal rules. The beneficial owner may also request voluntary registration where the value of taxable supplies is below the registration threshold. Notice 700/1: should I be registered for VAT gives more information on registering for VAT.

But where the trustees receive the benefit of the proceeds they should register for VAT as a single person if the value of their taxable supplies is above the registration threshold.

7.2 Joint owners of land or buildings

Where more than one person owns land or buildings, or receives the benefit of the proceeds from the grant of an interest in land or buildings, we treat them as a single person making a single supply for VAT purposes.

If the joint owners are making taxable supplies above the registration threshold they will have to register for VAT as a partnership, subject to the normal rules, even if no legal partnership exists. The joint owners may also request voluntary registration where the value of taxable supplies is below the registration threshold. For more information on VAT registration read Notice 700/1: should I be registered for VAT.

7.3 Compulsory purchases

If you’re obliged to dispose of land or buildings under a compulsory purchase order you’re making a supply for VAT purposes. Your supply will generally be exempt, unless you have opted to tax. Payments described as disturbance are treated as part of the consideration for the supply.

If at the time of supply you do not know how much you will receive, there will be a tax point each time you receive any payment for the purchase.

7.4 Options to purchase or sell an interest in land or a building

If you grant someone the right to purchase an interest in your land or building within a specified time you’re making a supply of an interest in land. The person acquiring such a right is said to have a ‘call option’ as they can call on you to sell your interest in the land or building as originally agreed. The liability of your supply will be whatever the liability of the land or building would be if supplied at that time.

If you’re granted the right to require someone to purchase your interest in the land or building within a specified time you will have a ‘put option’. The supply, made by the prospective purchaser, is not one of an interest in land and therefore falls outside the scope of the exemption for land supplies.

7.5 Recovery of rent from a third party

There are 3 common ways in which a landlord can recover rent from a third party. If you do receive payment from a third party you should still address any related VAT invoice to your tenant, as your supply is still to them and not the third party.

7.5.1 Law of Distress Amendment Act 1908

If a tenant sub-lets land or buildings to a third party and the tenant defaults on payment of rent to the landlord, the landlord can issue a notice under the Law of Distress Amendment Act and collect the rent arrears from the third party. In turn the third party can reduce their rent payable to the tenant by the amount they have paid to the landlord. If this happens the supply chain remains the same, there’s a supply of the land or building from the landlord to the tenant and a supply of the land or building from the tenant to the third party. If the landlord has opted to tax, any tax invoice must be issued to the tenant.

7.5.2 Sureties and guarantors

A surety or guarantor is normally party to any agreement between the landlord and the tenant. In the event that the tenant is unable to meet his liability to make the agreed periodic rental payments to the landlord then the surety or guarantor will make the payment on the tenant’s behalf. But there is no supply by the landlord to the surety or guarantor. The surety or guarantor will not be able to recover any tax paid.

7.5.3 Landlord and Tenant (Covenants) Act 1995

Landlords have, under common law, had the historic right to recover unpaid rent from former tenants (and their guarantors and sureties) as well as from current tenants, their guarantors and sureties. This right was regulated more tightly following the 1995 Act but the principle is the same, that is, the supply is to the defaulting tenant and not to the former tenant or the guarantors or sureties of either. But the 1995 Act does permit a former tenant who settles the outstanding debt to apply for an intermediary lease.

7.6 If you make free supplies of land and buildings

7.6.1 Permanent disposal

If you transfer or dispose of land or buildings that form part of the assets of your business free of charge you will still be making a supply. Where you have previously been eligible for input tax recovery in respect of the land or building (whether on the purchase or on the construction services when the building was built or substantially reconstructed) then its free disposal or transfer may trigger an output tax charge.

The value of such charges is calculated by reference to the market value of the property at the time of the disposal or transfer.

You must account for output tax on such supplies if:

• you were charged tax on the purchase, construction or substantial reconstruction of the land or building
• you were entitled to recover all or part of the input tax
• your supply is standard-rated, your supply will be standard-rated, for example, if you are disposing of the freehold of a new commercial building or if you have opted to tax (and the option is not disapplied)

For further information, see section 3.

If you’re making a free supply that is exempt rather than standard-rated you may be required to make an adjustment of input tax under ‘clawback’ or the Capital Goods Scheme if you were entitled to recover input tax in connection with the property. For further information, see Notice 706: partial exemption and Capital Goods Scheme (VAT Notice 706/2).

Where the recipient of a free supply is registered for VAT and is acquiring the land or building for a business purpose, you may be able to use the procedure described in Business promotions (VAT Notice 700/7) to provide acceptable evidence to support a claim for input tax.

7.6.2 Temporary use

Where you intend to put a building to private or non-business use and the acquisition, construction, reconstruction or refurbishment costs have been incurred on or after 1 January 2011 you must only recover that proportion of the VAT that relates to your taxable business supplies. It’s important that when considering the appropriate apportionment that you take into account all the intended future use over the economic life of the building (normally reckoned as 10 years, in line with the Capital Goods Scheme).

If the acquisition, construction, reconstruction or refurbishment costs incurred on or after 1 January 2011 are assets of the business and create a capital item, that is, have a value of £250,000 or more, Capital Goods Scheme adjustments will be carried out to reflect any changes in business or taxable use of the building, see Capital Goods Scheme (VAT Notice 706/2).

7.7 If you transfer your business as a going concern

If you’re transferring land or buildings that are let to tenants or are in the process of being let, you should read Transfer a business as a going concern (VAT Notice 700/9).

If you’re transferring land or buildings that are capital items for the purposes of the Capital Goods Scheme, you should make the purchaser aware of any Capital Goods Scheme adjustments you have made. You will need to provide the purchaser with sufficient information to enable them to carry out any future adjustments under the scheme that might be necessary. See Capital Goods Scheme (VAT Notice 706/2) for details.

7.8 If you have land and buildings on hand when you cancel your registration

If you cancel your VAT registration because you are closing down your business or trading below the registration limits, some or all of the assets on hand (including land and buildings) may be treated as supplied by you when you cancelled your VAT registration. You will have to account for VAT on these assets if the following conditions are met:

• you were entitled to claim input tax on their acquisition or on their construction where that construction created a new building, or acquired them as a transfer of a going concern and a predecessor owner was entitled to claim input tax
• your supplies of them, if made, would be taxable (for example because you have opted to tax)
• the total VAT on the assets if treated as made is over £1,000

If the land or buildings are capital items for the purposes of the Capital Goods Scheme you may need to make a final adjustment under the scheme. Further information can be found in Capital Goods Scheme (VAT Notice 706/2).

If you’re a farmer operating under the Agricultural Flat Rate Scheme and can produce a certificate of evidence to that effect, then this paragraph does not apply to you.

7.9 If the land or building includes fixtures and fittings

If fixtures and fittings are included with a building or land they are not treated as separate supplies for VAT purposes. This means that their liability is the same as that of the land or building with which they’re being supplied.

7.10 Stamp Duty Land Tax

The value of a transaction for Stamp Duty Land Tax purposes includes any VAT that is chargeable.

Read about Stamp Duty Land Tax.

8. Developers’ agreements

8.1 Dedicating or vesting new roads or sewers

Agreements drawn up between developers, local authorities and water sewerage undertakers make provision for a wide variety of land, buildings and works to be provided, at the developer’s expense, in connection with the granting of planning permission for the development.

It is not a supply by you if you as a developer dedicate or vest, for no monetary consideration either a new:

• road (under the provisions of the Highways Act 1980 or the Roads (Scotland) Act 1984)
• sewer or ancillary works (under the provisions of the Water Industries Act 1991 or the Sewerage (Scotland) Act 1968)

No VAT is chargeable to the local authority or sewerage undertaker.

The input tax you incur on the construction of such works is attributable to your supplies of the development that is served by the road or sewer. For example, if your supplies of the land or buildings are taxable supplies, such as new houses, then the input tax you incur on constructing the roads and sewers is recoverable according to the normal rules. Where you make exempt supplies you will not be able to recover all your input tax.

8.2 Transfers of common areas of estates to management companies

As a developer of a private housing or industrial estate you may transfer, for a nominal monetary consideration or peppercorn, the basic amenities of estate roads, footpaths, communal parking and open space to a management company that will maintain them. This is not a supply, but the input tax you incurred on the building costs is attributable to the supplies of the land and buildings of the development itself.

8.3 Community Infrastructure Levy

The Community Infrastructure Levy (CIL) is a levy that local authorities in England and Wales can choose to charge on developments in their area. The money obtained can be used to support development by funding infrastructure that the council, local communities and neighbourhoods want. It’s a levy charged upon developers.

CIL is not consideration for any supplies by local authorities to developers and consequently it is outside the scope of VAT.

Developers can elect not to pay money to the local authority but instead to transfer an asset such as land to the authority. Again this is not consideration for any supplies by the local authority to the developer. But the transfer of the asset can result in a supply of it by the developer to the local authority. See paragraph 7.6 for further information.

8.4 Planning gain agreements

As a developer you may provide many other types of goods and services free, or for a purely nominal charge, to the local or other authority under section 106 of the Town and Country Planning Act 1990 or other similar agreements. These agreements are sometimes described as ‘planning gain agreements’.

Such goods and services may include buildings such as community centres or schools, amenity land or civil engineering works. Alternatively, they may be in the form of services such as an agreement to construct something on land already owned by the authority or a third party. Any such provision of goods or services is not a supply for a consideration to the local or other authority, or to the third party. So no VAT is chargeable by you on the handing over of the land or building or the completion of the works. But the input tax you incur is attributable to your supplies of land and buildings on the development for which the planning permission was given.

8.5 Agreements with the Highways Agency

When a development is undertaken there may need to be road improvements. These road improvements will normally be undertaken in either works carried out by the:

• Highways Agency
• developer

8.5.1 Works carried out by the Highways Agency

The Highways Agency will arrange for the works to be carried out. Under section 278 of the Highways Act 1980, the Highways Agency may then recover from you, the developer, the costs incurred by the Highways Agency on certain road improvements. These costs will normally include irrecoverable VAT that has been charged to the Highways Agency by a contractor. As there is no supply between the Highways Agency and yourself, but merely a reimbursement by you of VAT inclusive costs, you are not entitled to recover the VAT element as your input tax.

8.5.2 Works carried out by the developer

If you, the developer, are permitted by the Highways Agency to carry out the works at your own cost, then there is no supply by you of the works to the Highways Agency. This is because you do not receive any consideration for the works from the Highways Agency. But you may recover the input tax as attributable to your own ultimate supply of land and buildings from the development. For example, if the development is a taxable supply you can recover all the input tax.

8.6 If you’re asked to make a cash contribution

You may be required to pay sums of money, or sums of money in addition to buildings or works, to a local authority or a third party under section 106 of the Town and Country Planning Act 1990 and other similar agreements. You may, for example, pay money towards the future maintenance of a building or land, or as a contribution towards improvement of the infrastructure. Such sums are not consideration for taxable supplies to you by the local authority or by the third party.

9. Mortgages

9.1 The basic position

If you mortgage your property, as security for borrowing money, you are not making a supply of that property.

9.2 If your land or buildings are repossessed and then sold

Sales of repossessed property take place in 2 ways:

• under a power of sale
• foreclosures

9.2.1 Under a power of sale

If a financial institution, or any other person, sells land or buildings belonging to you in satisfaction of a debt owed by you, you are making a supply. If tax is due on that supply, the person selling the land or buildings is responsible for accounting for that VAT (see paragraph 9.4 for more information).

9.2.2 Foreclosures

If a person obtains a Court Order and forecloses on land or buildings belonging to you, there’s a supply by you to that person of the land or building. But it’s possible that the land or building could be treated as an asset of a business that is transferred as a going concern. See Transfer a business as a going concern (VAT Notice 700/9) for details. The person foreclosing can opt to tax. If the land or building is subsequently sold the person foreclosing makes the supply.

9.3 If your land or buildings are repossessed and then rented out

A lender may repossess land or buildings, or appoint a Law of Property Act (LPA) receiver without foreclosing, where the land and buildings are rented out to tenants. If the rental income received by the lender is used to reduce the debt you owe, or to make interest payments due in respect of that debt, a supply by you to the tenant takes place. If the supply is standard-rated the lender or LPA receiver should account for VAT on your behalf (see paragraph 9.4 for more information).

9.4 How the lender or LPA receiver accounts for the VAT

There are a number of methods under which the lender or LPA receiver can account for VAT. If you require details of how to remit VAT on behalf of a borrower see Insolvency (VAT Notice 700/56).

10. Supplies between landlords and tenants

10.1 If you pay an inducement to a prospective tenant

There is no supply for VAT purposes by a prospective tenant if you pay that prospective tenant for doing no more than entering into a lease with you.

But if you pay an inducement to a prospective tenant who, in return, provides a benefit to you other than that customarily derived from entering the lease, then there is a supply. The VAT liability of the supply will depend on the nature of the benefits provided, which could for example involve undertaking improvements or repairs to the building.

Where the tenant acts as an anchor tenant (to attract other tenants) their supply will always be a standard-rated supply. In such cases, the input tax you incur on the payment to the tenant is attributable to your lettings of the building and will generally be recoverable where you have opted to tax (see Opting to tax land and buildings (VAT Notice 742A)).

An inducement paid by a tenant to a third party to accept the assignment of a lease is not consideration for the assignment or grant but is a standard-rated supply of services by the third party.

10.2 Rent-free periods

Rent is the periodic payment made by a tenant to a landlord and is normally the subject of a written agreement. Rent payments can be non-monetary, and can include costs incurred by the landlord under the agreement which are recharged to the tenant. This will include items such as service charges and rates where the landlord is the rateable person.

If you grant a rent-free period or a rental reduction to a tenant who agrees to do something in return, then you have both made and received a supply. Both supplies will be of equal value, but will not necessarily have the same VAT liability. If nothing is done or received in return for the rent-free period then, so far as that period is concerned, no supply has been made.

10.3 If you pay your tenant to surrender a lease

If you pay a tenant or licensee to surrender any interest in, right over or licence to occupy land that is a supply to you by the tenant. That supply is generally exempt, unless the tenant has opted to tax.

10.4 If you accept the surrender of a lease from your tenant

If you accept the surrender of a lease in return for payment from the tenant (sometimes referred to as a ‘reverse surrender’), your supply is exempt unless you have opted to tax.

10.5 Variations to leases

Some variations to leases simply alter 1 or more of the terms, such as permitting the building to be used for a purpose that was originally prohibited. Other variations to a lease are more fundamental, such as an extension to the length of the tenancy or an alteration to the demised area. Where the latter occurs the old lease is treated as surrendered and a new lease granted in its place. Any consideration you receive for either type of variation is exempt, unless you have opted to tax. But where there is no monetary consideration, no supply is seen as taking place if the variation merely extends the term or extends right of occupation to a larger part of the same building.

10.6 Restrictive covenants

Restrictive covenants are placed on land to control its use. A typical restrictive covenant is one that forbids any development of the land.

If you agree to give up a restrictive covenant in return for payment your supply will be exempt, unless you have opted to tax the land the restrictive covenant applied to or the supply of the land is itself excluded from exemption (see paragraph 3.1).

10.7 Statutory payments

Any statutory compensation you pay to a tenant under the terms of the Landlord and Tenant Act 1954 or the Agricultural Tenancies Act 1995 is outside the scope of VAT. This applies even if an agricultural tenant has issued a notice to quit having decided to retire from farming. Examples of items for which statutory compensation is given on the tenant quitting property are milk quotas left behind, manurial values and standing crops.

Where you and the tenant agree that the tenant will leave in return for additional payment, the payment you make will be consideration for the tenant surrendering the lease and will generally be exempt, unless the tenant has opted to tax.

10.8 Indemnity payments

Generally any payment that you, as a prospective tenant, have to make in order to obtain the grant of a lease or licence is part consideration for that grant. This is the case even if the payment is described as a reimbursement or indemnification of the landlord’s costs. Whether the payment attracts VAT depends on whether the landlord has opted to tax.

Many leases provide that an existing tenant shall make good any legal or other advisory costs incurred by the landlord as a result of the tenant exercising rights already granted under the lease. For example the tenant may be entitled to assign the lease, to sublet or to make alterations to the building provided that the tenant first obtains the landlord’s consent. As a result the landlord may incur legal or surveyors fees. In these circumstances the reimbursement payments by the tenant to the landlord are consideration for the principal supply of the lease.

If you have to make a payment to your landlord to obtain some additional right, it’s consideration for the variation of the lease and is exempt unless the landlord has opted to tax.

10.9 If rent adjustments are needed when a building is sold

When a tenanted building is sold or a lease is assigned mid-way through a rent period, an adjustment is normally made to the consideration at the point of completion. These rent adjustments are not consideration for any supply and are outside the scope of VAT.

For VAT purposes the consideration for the sale of the building or the assignment of the lease is the full value of the supply before any rent adjustment is made.

Rent adjustments may be made as follows:

Where	the amount paid for the purchase is
a landlord selling a building has received rent from tenants in occupation that relates to the period when the incoming landlord will be in ownership	reduced to reflect the rent paid in advance
a building is sold and the incoming landlord will receive rent from tenants in occupation which relates to the period when the outgoing landlord was in ownership	increased to reflect that rent
an outgoing tenant assigning a lease has paid rent which relates to the period of occupation by the incoming tenant	increased to reflect the rent paid in advance
a lease is assigned and the incoming tenant pays rent which relates to the period of occupation by the outgoing tenant	is reduced to reflect that rent

10.10 If you get arrears of rent following a rent review

Where arrears of rent become due following a rent review output tax should normally be accounted for on the payment where an option to tax has been made, even if the arrears relate to period before the option to tax took effect. See Opting to tax land and buildings (VAT Notice 742A).

10.11 Landlords ‘contributions towards tenants’ costs

The treatment for VAT purposes of a landlord’s contribution to costs incurred by a tenant will depend on the contractual position and the reason for the contribution. The general rule is that payment becomes consideration for a supply for VAT purposes when there’s a direct link between what is paid and goods or services supplied in return for it. By contrast a payment freely given, with nothing supplied in return, is not consideration for a supply.

Where, for example, a landlord contributes toward the cost borne by a tenant of fitting out the demised premises, it is necessary to determine who’s responsible for that work. If, as is quite often the case, it’s the tenant then the contribution by the landlord is unlikely to be consideration for a supply by the tenant, unless there’s some other benefit received in return for it. For these purposes, the fact that the landlord may be able to claim Plant and Machinery Allowance in relation to the contribution paid is not of itself such a benefit received in return for that payment. By contrast, if the fitting out is the landlord’s responsibility then the contribution paid to the tenant is likely to be consideration for a supply by the tenant to the landlord.

10.12 Dilapidation payments

The terms of a lease may provide for the landlord to recover from tenants, at or near the termination of the lease, an amount to cover the cost of restoring the property to its original condition. The amount is often agreed between the parties and may be based on a surveyor or contractor’s estimate.

A dilapidation payment represents a claim for damages by the landlord against the tenant’s ‘want of repair’. The payment involved is not the consideration for a supply for VAT purposes and is outside the scope of VAT.

10.13 If you refurbish a building having had a dilapidation payment

If, as a landlord, you carry out refurbishment works following receipt of a dilapidation payment, the input tax you incur in carrying out those works should be treated as follows, if the refurbishment works are used:

• exclusively in making taxable supplies, then the related input tax is wholly recoverable
• exclusively in making exempt supplies, then the related input tax is wholly irrecoverable
• in making both taxable and exempt supplies, then related input tax is residual and should be recovered in accordance with your normal partial exemption method, see VAT Notice 706: partial exemption for more information

11. Service charges on commercial buildings

11.1 Service charges

It’s common for leases between landlords and tenants to lay down that the landlord will provide, and the tenants will pay for the upkeep of the building as a whole. The lease may provide for an inclusive rental, or it may require the tenants to contribute by means of a charge additional to the basic rent. These charges are generally referred to as service charges, maintenance charges or additional rent. The services provided may include:

• repairs and maintenance to the building
• the management of repairs and maintenance
• management of the lease
• provision of concierge and warden
• insurance

11.2 The liability of leasehold service charges

If, as a landlord or licensor, you’re obliged under the terms of the lease to provide services similar to those above, the service charges follow the same VAT liability as the premium or rents payable under the lease or licence (normally exempt, unless you have opted to tax).

11.3 If you supply services to freehold occupants

If you provide services to someone who owns the freehold of a building and there are no continuing supplies of accommodation to which the service charge can be linked, your charge is always standard-rated.

11.4 If you supply services to the occupants of holiday accommodation

If you provide services to the occupants of holiday accommodation your supply is standard-rated. See Hotels, holiday accommodation (VAT Notice 709/3) for more information.

11.5 Services provided by someone other than the landlord or licensor

If you’re responsible for providing services to the occupants of a building in which you have no interest, your services will always be standard-rated (subject to the VAT registration threshold) as they are not part of the supply of the accommodation itself.

If your contract is to arrange for the services and to collect the service charge on the landlord’s behalf as a managing agent, then your supply is to the landlord and not to the occupants. Your supply is still standard-rated.

11.6 Payments collected by a tenant for the landlord

If you collect payments from the other occupants for their share of the rent, rates and other costs, and you pass the full amount of these to the landlord, you should treat the sums collected from the other occupants as disbursements. See the VAT guide (VAT Notice 700) for more information on disbursements.

11.7 Other charges made by landlords to tenants

As a landlord you may make charges to your tenants for items other than general services. These charges tend to fall into 3 categories:

• further payment for the main supply of accommodation, that follow the liability of that supply (normally exempt, unless you have opted to tax)
• for supplies other than accommodation (normally standard-rated)
• disbursements (outside the scope of VAT), further information on disbursements can be found in the VAT guide (VAT Notice 700)

The rest of this paragraph outlines the VAT treatment of some of the most common charges.

11.7.1 Insurance and rates

If you (the landlord) are the policyholder or rateable person, any payment for insurance or rates made by the tenants is further payment for the main supply of accommodation. If the tenant is the policyholder or rateable person, and you make payments on the tenant’s behalf, you should treat those payments as disbursements.

11.7.2 Phones

If the phone account is in your name, any charge you make to tenants is payment for a standard-rated supply by you. This includes the cost of calls, installation and rental. If the account is in the name of the tenant, but you pay the bill, the recovery of this from the tenant is a disbursement.

11.7.3 Reception and switchboard

If you make a charge under the terms of the lease to tenants for the use of facilities that form a common part of the premises, such as reception and switchboard services, any payment you receive will be further consideration for the main supply of accommodation.

11.7.4 Office services

If you make a separate charge for office services, such as typing and photocopying, this is a separate standard-rated supply. But if under the terms of the lease, there is one inclusive charge for office services and accommodation together, and the tenants are expected to pay for the services regardless of whether they actually use them, the liability of the services will follow that of the main supply of office accommodation.

11.7.5 Fixtures and fittings

Fixtures and fittings are regarded as part of the overall supply of the accommodation and any charges for them are normally included in the rent. But if you provide fixtures and fittings under a separate agreement your supply will normally be standard-rated.

11.7.6 Electricity, lighting and heating

If you make a separate charge for un-metered supplies of gas and electricity used by tenants, it should be treated as further payment for the main supply of accommodation. But where you operate a secondary meter, the charges to the tenants for the gas and electricity they use are consideration for separate supplies of fuel and power. These supplies will be standard-rated unless the fuel supplied is of a de-minimis quantity, in which case the supply will be subject to the reduced rate. See Fuel and power (VAT Notice 701/19) for more information.

11.7.7 Management charges

The charge raised by you to the occupants for managing the development as a whole, and administering the collection of service charges and so on, is further payment for the main supply of accommodation.

11.7.8 Recreational facilities

If the charges for the use of recreational facilities are compulsory, irrespective of whether the tenant uses the facilities, then the liability will follow the main supply of accommodation.

11.8 Shared premises

If you’re the owner or tenant of the premises and you do not grant other occupants an exempt licence to occupy land (see paragraph 2.5 and 2.6), then any service charge you make is standard-rated. This applies even if you’re simply passing on an appropriate share of your costs. The only exception is if you’re paying and recharging a bill that is entirely the liability of another occupant, such as a phone bill or insurance premium in the other occupant’s name. You can treat such payments as disbursements. You can find more information on disbursements in the VAT guide (VAT Notice 700).

12. Service charges and residential accommodation

12.1 The basic position

Service charges payable by a holder of a residential lease or tenancy are further payment for an exempt supply of an interest in land by the landlord to the leaseholder or tenant. These periodic charges represent the cost to the landlord of fulfilling his contractual obligations, including the provision of various services, as required under the lease or tenancy agreement.

Landlords usually contract out the supply of goods and services they are contractually obliged to provide to an occupant. They will also allow a property management company, or someone similar to collect the periodic charges from the occupant on their behalf. This supply by the property management company or similar is a taxable supply to the landlord, not to the leaseholder or tenant.

A property management company cannot treat supplies made direct to an occupant of a building (whether a leaseholder, tenant or freeholder) as exempt supplies, see paragraph 12.4.

In the case of supplies made in Scotland see paragraph 12.6.

12.2 If you provide services to freehold owners of residential accommodation

If you are a landlord and provide services to a freehold owner of residential accommodation, your supply is taxable at the standard rate of VAT because there is no actual supply of residential accommodation being made to the freehold owner.

However, if you are obliged to provide any of the following to the freeholder:

(a) upkeep of the common areas of a housing estate, such as paths, driveways and communal gardens
(b) upkeep of the common areas of a block of flats, such as lift maintenance, fire alarms, corridors, stairwells and general lounges, and so on
(c) general maintenance of the exterior of the block of flats or individual dwellings, such as painting
(d) provision of an estate warden, house manager or caretaker

on an estate shared by leaseholders and freeholders, you can apply an extra-statutory concession to treat these supplies to freehold owners as being exempt from VAT - see paragraph 3.18 of VAT Notice 48: Extra Statutory Concessions.

If you do choose to apply this concession and treat the periodic charges as exempt, your right to recover any associated input tax may be restricted. This may also have an impact on your eligibility to remain registered for VAT.

A property management company is not entitled to use the concession to treat supplies made direct to a freehold owner as exempt, see paragraph 12.4.

12.3 Landlord or property management company supplying additional services to occupants

If, as a landlord, you make a separate charge for un-metered supply of gas and electricity used by occupants, this should be treated as further payment for the main supply of exempt domestic accommodation. However, if you operate a secondary credit meter this is a separate supply of fuel and power so the charges to the occupants for the gas and electricity are subject to VAT at the reduced rate.

Optional services supplied by landlords or property management companies direct to occupants, (such as shopping, cleaning or internal decoration of a dwelling), are fully taxable. These supplies are not normally linked to the grant of a residential lease or tenancy and the supplier should account for the relevant tax.

12.4 Services to occupants on behalf of a landlord, as part of the landlord’s contractual obligations

If you, as a property management company or similar, agree to collect payments from the occupants of a property, on behalf of the landlord, the following will be consideration for a taxable supply of management services to the landlord, any monies:

• you collect from occupants on behalf of the landlord and retain to cover the cost of your services
• paid direct to you by the landlord for your services

You cannot:

• treat your own supplies as being exempt to a leaseholder or tenant
• use the extra statutory concession described in paragraph 12.2, to treat supplies made direct to a freehold owner as exempt

You may also purchase goods and services that are directly related to the landlord’s contractual obligations to the occupant. Any costs incurred should be passed back to the landlord in one of 2 ways:

(a) Recharge the gross costs to the landlord using the invoicing procedures outlined in section 23 of the VAT guide (VAT Notice 700). This means that any VAT recovered by you on these costs must be balanced by an onward charge to the landlord in the same accounting period, or
(b) treat the costs you have incurred on behalf of the landlord as ‘disbursements’ for VAT purposes. This means you do not charge VAT on these costs when you invoice the landlord, and cannot claim back any VAT on them. For more information on disbursements and the conditions needed to meet them, read section 25 of the VAT guide (VAT Notice 700).

12.5 Tenant-controlled management company providing the services

Occupants of an estate or building may form a tenant-controlled management company, which in turn may acquire the freehold of the estate or building. In these circumstances, the tenant-controlled company becomes the landlord and is contractually obliged to provide the services to the occupants of the estate or building. Paragraphs 12.2 to 12.4 will apply if they engage a property management company or similar.

12.6 Supplies made by a ‘factor’ in Scotland

In Scotland, an occupant of certain residential accommodation may be contractually obliged to maintain common areas of a building they are occupying. To do this, the occupant may need to engage a ‘factor’ to carry out such maintenance work on his behalf. In these circumstances, the factor may treat supplies of a type listed in paragraph 12.2, to the occupant as exempt supplies. This may however, restrict the factor’s right to recover any associated input tax and impact on his eligibility to remain registered for VAT.

The supply by the factor of his own services to a residential occupant in Scotland for fulfilling their contractual obligations is a separate taxable supply.

13. Commonhold and leasehold reform

13.1 The Commonhold and Leasehold Reform Act 2002

Until the Commonhold and Leasehold Reform Act 2002 English law recognised only 2 forms of property ownership. These are:

• freehold, which confers upon the person designated as the freeholder an absolute title in a property
• leasehold, which confers upon the person designated leaseholder a lesser interest in a property such as holding that interest for a fixed number of years

Until the reforms brought in by the Act leasehold was the most practical means of enforcing positive legal obligations to bind successive owners of parts of buildings, occupied in common, such as a block of flats.

The new form of property ownership introduced in 2002 is commonhold, which confers upon owners of parts of a building, occupied in common, freehold interests in their respective parts (units) of the property. The freehold interest in the property’s communal area and often its structure (the common parts) is owned by a commonhold association whose membership comprises the owners of the units.

In addition to introducing a new alternative to leasehold as a means of property ownership the Act of 2002 also reformed residential leasehold law.

13.2 Commonhold (Part 1 of the Commonhold and Leasehold Reform Act 2002)

Commonhold will be available for residential, commercial or mixed use developments. Those who own the interests in individual units under commonhold are referred to as ‘unit-holders’.

13.3 The reforms

The reforms are intended to give unit-holders the security of freehold ownership by addressing some of the drawbacks of leasehold (such as the diminishing value of leases). They also seek to overcome the difficulties in enforcing positive obligations, such as such as an obligation to keep property in good repair, in freehold land.

13.4 The commonhold arrangement

A commonhold may only be registered upon the agreement of all those with a prescribed interest in the property.

The developer of a property, or a landlord, may enter into an agreement with existing occupants or future (identified) unit-holders to set up a commonhold. This is most likely to happen where a leasehold development is being converted to a commonhold.

Alternatively, property may be registered as a commonhold in advance of the future unit-holders being identified. The developer will then sell the units in the same way as any other freehold property.

The unit-holders acquire a freehold interest in a specific unit. It is the commonhold association, a type of management company, that owns the freehold of the common parts. The members of the commonhold association will be unit-holders. But where a unit is jointly owned, only one of the joint owners will become a member.

The commonhold association is responsible for the upkeep of the common parts and will provide an estimate of annual expenditure, the commonhold assessment.

13.5 The correct VAT treatment of transactions

A commonhold unit is a freehold in a property that follows the normal VAT accounting rules. These rules are set out in section 3.

13.5.1 The liability of supplies of qualifying buildings (for example, residential property)

The developer of a qualifying building (that is a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential or a relevant charitable purpose) may zero rate the first supply of a commonhold unit in the property if the normal conditions for zero rating are met (see Buildings and construction (VAT Notice 708)).

If the conditions are met the zero rating will apply in both of the following circumstances, the:

• first sale of the freehold units in a commonhold to prospective unit-holders
• transfer by operation of law of the freehold of the common parts in the commonhold to the commonhold association, on the registration of the commonhold

Any subsequent supplies of the units are exempt.

13.5.2 The liability for supplies of non-qualifying buildings (for example, commercial property)

These will be exempt from VAT unless the supply is either any sale of a commonhold unit or freehold of a:

• new building (a new building is one that is less than 3 years old) or a partly-completed non-qualifying building
• commercial property that has been opted to tax (subject to the disapplication test, see Opting to tax land and buildings (VAT Notice 742A))

In which case it will be standard-rated.

13.6 VAT treatment in specific transactions creating a commonhold

In setting up a commonhold there are 3 basic forms of transaction. These are set out below together with their VAT treatment.

13.6.1 A developer constructs a new building and sets up a commonhold

With regard to the first supply of each unit where this involves commercial property, it will be standard-rated, as long as that the supply is made before the property is 3 years old or if not, the developer has opted to tax (subject to the disapplication rules) and where it involves residential property, the supply will be zero-rated.

For both residential and commercial property, the freehold interest in the common parts is vested in the commonhold association. Normally there will be no consideration attributed to the disposal but it’s a supply for VAT purposes and there will be a requirement to charge VAT if the conditions of paragraph 7.6 apply.

13.6.2 A number of freeholds are converted into a single commonhold

This may occur when the proprietors of existing freehold properties apply for commonhold status because they have communal facilities such as shared roadways, paths or services. This could entail some or all of the existing freeholders giving up title to areas of their land (constituting what are to become the common parts). Any payment made to a former freeholder is likely to be seen as consideration for the surrender of the freehold interest. The liability being as follows:

• commercial property is exempt, but if the property is still new (less than 3 years old) or if an option to tax has been made (subject to the disapplication rules) the supply will then be standard-rated
• residential property is exempt but if a major interest has not been previously granted in this property (probably because the freeholder was also the person who constructed the building for his own occupation), then the supply will be zero-rated

13.6.3 A leasehold is converted into commonhold

Leasehold conversions will generally occur in developments that already have existing leaseholders in place prior to the establishment of the commonhold. Following agreement between the interested parties and the land being registered as commonhold all pre-existing leases are extinguished.

Where the former leaseholder gains ownership of a commonhold unit in the same property that was demised under the lease, the only supply is that of the freehold. The lease ceases to have legal effect and there is no supply of it for VAT purposes.

But when the lease is extinguished and the freehold is transferred to some other person, or the freehold units have different boundaries from the previous leasehold premises, for VAT purposes there’s a supply of a surrender of an interest in the property by the former leaseholder.

The surrender of a lease in a commercial property is exempt. But if the lessee has opted to tax the supply will then be standard-rated (subject to the disapplication rules).

The surrender of a lease in residential property is exempt.

Where the leaseholder pays a consideration for the freehold interest in the unit they acquire the liability for a:

• commercial property is exempt unless the property is less than 3 years old or it’s been opted to tax
• residential property is exempt, unless it is the first supply of a major interest in which case it will be zero-rated

13.7 Other commonhold transactions

13.7.1 Sale of a commonhold unit by a unit holder

The individual disposal of a unit follows the normal rules on VAT and therefore if commercial property is exempt but if the property is still new (less than 3 years old) or if an option to tax has been made (subject to the disapplication rules) then the supply will then be standard-rated. And if a residential property is exempt, through the purchase of a commonhold unit the purchaser can acquire membership of the commonhold association and therefore, an interest in the common parts. Normally there will be no consideration attributed to the transfer of interest but it is a supply for VAT purposes and there will be a requirement to charge VAT if the conditions of paragraph 7.6 apply.

13.7.2 The termination of a commonhold

A commonhold may be terminated as a result of a voluntary winding-up or by court order.

Voluntary winding-up

The commonhold association must specify proposals for the transfer of the commonhold land and explain how the assets of the association are to be distributed. Any payment received by either the commonhold association or by the unit-holders will be seen as a consideration for a freehold interest and the liability will be in accordance with the normal rules, as explained above.

Winding-up by court

Where a commonhold association becomes insolvent, a successor commonhold association may be registered as the proprietor of the freehold estate in the common parts. Normally there will be no consideration attributed to the disposal but it is a supply for VAT purposes and there will be a requirement to charge VAT if the conditions of paragraph 7.6 apply

13.8 How to treat the commonhold assessment for VAT purposes

Charges can be levied by the commonhold association to pay for the upkeep of common parts. These charges are referred to as commonhold assessments and reserve fund levies and are treated in the same way as service charges to a long leaseholder or a non-commonhold freeholder.

The VAT treatment of service charges raised in respect of commercial buildings is explained in section 11. For dwellings it’s set out in section 12. Where the commonhold association is providing the services as outlined in paragraph 12.2 directly to the unit holders of dwellings, the charges may be treated as exempt under the extra statutory concession for mandatory service charges.

Alternatively, the commonhold association may engage a service provider to maintain the common parts of an estate. In this case its position is akin to that of a tenant-controlled management company as explained in paragraph 12.5. As the commonhold association is obliged under the commonhold community statement to maintain the common parts, then providing the unit-holders are invoiced by and pay the service charges directly to the service provider, the charges raised under the commonhold assessment may still be treated as exempt.

But, any management fee collected from the occupants is standard-rated because it relates to the service provider’s supply to the commonhold association.

13.9 Leasehold Reform - Part 2 of the Commonhold and Leasehold Reform Act 2002

This part of the legislation is generally directed at residential leaseholders in a multi-occupancy building. It amends the Leasehold Reform Housing and Urban Development Act 1993 which permitted leaseholders to acquire the freehold interest in a property through collective enfranchisement and to extend the length of their individual leases. Amendments are also made to other legislation including the Landlord and Tenant Act 1985, which introduced rights for tenants in relation to the payment of service charges.

13.10 The reforms

These include various provisions concerning the rights to collective enfranchisement. The freehold title of the property is vested in a nominee that must be a qualifying Right to Enfranchisement company (RTE). The reforms also confer a new right upon leaseholders, who do not wish to buy the freehold of a property, that enables them to form a ‘Right to Manage’ (RTM) company that will take over these duties from the landlord or the service provider. There are provisions for up to 25% of a block to be occupied for non-residential purposes although these occupants will not be qualifying tenants for the purpose of collective enfranchisement or the RTM.

13.11 The liability of service charges raised by an RTM company

The rules for service charges for dwellings are as per section 12 and services provided by the RTM company may be treated as exempt if, within the terms of the agreement leaseholders are invoiced by and pay the service charges directly to the RTM company. Section 11 covers the liability of leasehold service charges raised to tenants who are in occupation for commercial purposes.

13.12 Recovering VAT by an RTE company

An RTE company may recover VAT if part of the premises to which it has freehold title has commercial tenants. It must opt to tax the property and account for VAT on all rents to commercial tenants. The VAT on costs will be recoverable to the extent that they relate to the commercial rents. More information is available in Opting to tax land and buildings (VAT Notice 742A).

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Published 29 May 2012
Last updated 31 December 2020 + show all updates

1. 31 December 2020

   This page has been updated because the Brexit transition period has ended.

2. 3 December 2020

   This notice has been updated to reflect the VAT reduced rate for tourism and hospitality has been extended from 12 January to 31 March 2021.

3. 28 July 2020

   Section 3.1 of the notice has been updated with changes to the temporary reduced rate of VAT on certain supplies of land.

4. 9 July 2020

   The notice has been updated to reflect the changes announced on 8 July 2020 regarding the temporary reduced rate of VAT on certain supplies to hospitality, holiday accommodation, or charge for admission to certain types of attractions.

5. 29 May 2012

   First published.