VAT on land?

September 26th 2023

You have a deal with a local farmer, giving you first refusal to purchase ten acres of land including buildings if the farmer decides to sell it in the next ten years. Is the farmer right to charge VAT on the fee and can you claim input tax? Vat expert John Craig explains below.

A full land option means that you would have the right to purchase the farmer’s land in the future, irrespective of whether the farmer wants to sell. There is usually a time-cap in the option agreement and the selling price will depend on the market value of the land at the time of the sale.

However, the agreement between you and the farmer is known as a “pre-emption” right, i.e. there is no requirement for you to purchase the land in the future, only to have the first right of refusal if the farmer decides to sell.

In both situations, the VAT charge on the land option fee will be at the same rate as the sale of the land or building in question. So, if the building sale by the farmer would be exempt from VAT, the option fee will also be exempt. If the building sale will be standard-rated, so will the option fee.

The freehold sale of a new commercial building is always subject to VAT if it is less than three years old. This means that any option fees charged in the first three years will be standard-rated, irrespective of any issues with the option to tax rules.

As the farmer is seeking to charge VAT on the land option fee, this indicates he has opted to tax this land with HMRC in the past. In other words, his income from the land is standard-rated because of the option to tax election that has been made.

It’s important that you get proof from the farmer that the tax election has been made, otherwise HMRC could seek to disallow the input tax claim.

You can only claim input tax on the option fee if you intend to generate taxable sales from the land in the future. If the future land sale, or fee from assigning the option to a third party, will be exempt from VAT, the input tax on the farmer’s invoice will be blocked with partial exemption.
In most situations, the solution will be for you to also opt to tax your interest in the land, making future income subject to VAT, so that input tax can be claimed on the option fee and other project costs.

However, care is needed if you will be using the land for a residential project where some supplies might still be exempt, e.g. for building new dwellings on the land, and letting them out the rental income is exempt.

The option to tax election on land and buildings is always overridden for residential property. So, for a ground floor shop and first floor flat, the election will only be relevant for the shop.

If the farmer has opted to tax the land, the VAT charge will be correct. They should prove to you that their option was notified to HMRC. If your future income from the land will be taxable, you can claim input tax on your next return if you also opt to tax the land.

Contact our VAT experts for further detail or other related queries.

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