To charge VAT or not?

A decision released by the Court of Session on 20 May 2021 illustrates that whether VAT should be charged on transactions involving land and buildings is not always obvious. A brief summary is:

A business (the Landlord) bought an office block from a developer and granted a lease to a connected party (the Tenant) which generated income that is exempt from VAT.

The Landlord opted to tax the building with a view to recovering the VAT charged by the developer.

Normally the option to tax would result in the Landlord charging VAT to the Tenant. There are, however, anti-avoidance provisions that result in an option to tax being dis-applied in certain circumstances. The effect of the anti-avoidance provisions in this scenario is that the Landlord cannot charge VAT on the rent and cannot recover the VAT charged by the developer.

More than ten years after buying the office block the Landlord decided to sell it to a third party, subject to the continuing occupation by the Tenant. The third party was not registered for VAT so the conditions for outside the scope of VAT transfer of going concern treatment were not met.

Should VAT be charged on the sale of the building by the Landlord to the third party? The Court of Session decided that VAT should be charged on the sale of the building, although it was not a unanimous decision.

We recommend that you seek our advice in advance of any transaction you may be considering. For more information about how we can help please contact our VAT & Customs Duties Manager, Naveen