UPDATE - Land Remediation Relief

As an update to my August Blog on the potential loss of Land Remediation Relief - I am pleased to report that the Government has listened to the industry and the relief survives ...

Extract from HMRCs consultation response

"Land remediation relief
2.12 The original purpose of this relief was to provide a financial incentive to developers to bring land back into use that had been contaminated by previous industrial use or land containing derelict structures that would be prohibitively expensive to remove. Approximately 1,300 companies a year claim this relief costing the Exchequer around £40m. Based on the information available at Budget, the Government agreed with the OTS’s view that it failed to deliver its policy objective.
2.13 As part of the consultation, responses were received from a range of interested parties including companies and representative bodies. Respondents argued that removing this relief would affect the regeneration of uneconomic brown-field sites. Several companies claimed that they take land remediation relief into account when considering sites and that removal of this relief would make a significant number of their planned projects financially unviable.
Information was also presented that suggested abolishing this relief would exacerbate financial pressures on this sector resulting from the removal of the exemption from landfill tax for soils and waste from contaminated sites, which was agreed in 2009 and is coming into effect shortly.
2.14 The Government has considered the responses. Based on the evidence received in the consultation the Government has decided that removal of this relief, in conjunction with the already agreed removal of the exemption from landfill tax, would risk undermining the Government’s plans to support the housing and construction sectors through planning reforms and the release of large areas of publicly owned land for development. The Government has therefore decided not to abolish this relief"

The full response paper can be viewed here.

Self-Build Projects – What are my VAT costs and what has Planning Permission got to do with it?

Please note This is a very simple summary touching on some of the VAT implications for self builds, conversions and alterations to residential property. It is not by any means a bible on the subject, but I can help with more detail if required.

Zero Rating

Where you have bought a piece of land with the intention of having a new house built on it VAT will not usually be chargeable on construction costs and materials. This is because the builder can charge VAT at the zero rate on these services.

This would include typical situations like buying a bungalow, demolishing it and rebuilding a house on the site or converting a commercial building or a barn into a new home. Zero rating can also apply to approved alterations to listed buildings where listed building consent has been obtained.

Zero rating will not apply if you intend to build a new house which isn’t capable of being sold in its own right. So, if you are converting an outbuilding into a dwelling for a member of your family but the planning permission does not allow the “new dwelling” to be sold separately from the main property then zero rating will not apply and your builder will have to charge VAT at the full rate.

It is important to note that even where zero rating does apply it is pretty much limited to the labour supplied and materials used in the construction of or included in the fabric of the building and each case and the apportionment of the zero rating allowance to materials used and works done needs to be carefully considered.

Professional Services supplied  in respect of architects, design consultants and project management fees are not capable of attracting the zero rate on their own but the VAT you incur on these could be mitigated in a couple of  ways if you approach things in the right way from the outset.

One way to eliminate the VAT on these professional services is to get your builder to engage these professionals for you and provide the services directly. The builder can recharge you for these costs under a single lump sum contract known as a “design and build contract”.  If that is not possible and you want a more hands on approach then you can set up your own company to do that for you. Your company will contract to provide design and build services to you at cost engaging the builder and the professional advisers and so long as that company is VAT registered, it can charge you VAT at the zero rate and recover the Vat on the professional aspects neutralising the VAT costs.

Reclaiming VAT

If you are doing the build yourself, so long as you are creating new dwellings capable of being sold in your own right and you are not building or converting with the intention of selling or letting the property (at least in the foreseeable term, you are not barred from future sales) then you can reclaim the VAT on the cost of materials you have bought yourself from suppliers.

Again there are materials which qualify and some that don’t but any good VAT adviser can manage this for you and agree the amount you can reclaim with HMRC.

Reduced 5% Rate

There are also some things which can qualify for a reduced rate of VAT (5%) such as converting a house into self-contained flats or bedsits or going the other way and converting flats back into a single dwelling. The 5% rate can also apply to the refurbishment of properties which have not been lived in for at least 2 years.

Extensions and Granny Annexes

But what about things like Granny annexes or extensions?

This is where planning permission is so important.  Generally speaking an extension is highly likely to give rise to an irrecoverable VAT cost as in order to reclaim your VAT or qualify for zero rating the key is whether the works create a brand new dwelling which is capable of being sold independently from the main dwelling or building.

If VAT costs are high (20% often is no small sum) and you are planning a Granny Annex then not only does it need its own self-contained status BUT you also need your planning permission to be granted on the basis that you could sell the Annex separately without you having to sell your house or the main building and therefore attention to this element needs to be given at the outset.

Advice

It really doesn’t hurt to have someone look over the tax aspects of a build project for you. It could lead to savings and will certainly help you properly plan project costs.

 Anecdotally, a friend of mine was getting ceramic tiles fitted in the kitchen and bathrooms  and wood floors throughout the rest of the house  fitted by her new build developer all to be fitted for her before she moved in and supplied with the house. The Developer called these “extras” and the sales rep produced an invoice which attempted to charge her VAT on these items a not inconsiderable VAT cost of £1900. A letter later and she was refunded that £1900 which goes to show sometimes it is useful to have someone in the know at hand!

Dotting the "I"s and crossing the "t"s - Intra group loans

As a Solicitor, it is not uncommon for me to hear from the FD or Financial Controller of a group of companies that it is not usual practise for them to formalise their intra group lending arrangements.

Though standard terms would usually apply, ensuring that intra group lending was based on a bona fide commercial basis, very often, and even with large PLCs there is not  the sort of documentation or evidence of a loan available in the same way you would expect with say an external loan relationship. In fact it is common to find little more than a board minute ( if you are lucky) and some entries on the intra group balance statements.

The recent case of MJP Media Services Limited v HMRC (Upper Tribunal - 2nd September 2011) has highlighted that unless proper evidentiary documentation is kept, a court is unlikely to agree that a "lending relationship" has taken place for the purposes of the loan relationshp rules and this could have a very negative effect on the ability to claim deductions for corporate tax purposes.

http://www.tribunals.gov.uk/financeandtax/Documents/decisions/MJPMediaServicesLtd_v_HMRC.pdf

Furthermore, I can see that this evidentiary burden could have a negative impact wherever a company is expecting the existence of a loan to reduce a tax liability of whatever nature for the company.

Specifically, in the MJP case, the company had not retained copies of bank statements showing that payments had been made and the tribunal was "instead faced with a patchwork of accounting entries and partial documentation".

This case therefore serves as a warning for companies who manage their intra group "loans" in a very informal way. What HMRC and the courts will be expecting to see is a more formal agreement and actual evidence of loan payments being physically made into and from the banks accounts belonging to the relevant companies.

Trade related Property and Goodwill. An SDLT update?

Trade related property is defined in the RICS “Red Book” guidance as “any type of real property designed for a specific type of business where the property value reflects the trading potential for that business”

Examples of trade related business property include pubs, restaurants, hotels, care homes and cinemas (not an exhaustive list).

Previously HMRC have taken the very narrow view that a business such as a hotel is incapable of being sold separately from the property and as such any amount of the purchase price paid to acquire such a business attributable to “goodwill” is subject to SDLT as such goodwill is attached to the property itself and affects its value.

Under the SDLT legislation there is a duty to “just and reasonably” apportion the money paid to a seller between the business element and the property element. Complying with this requirement, taking a view and getting HMRC to agree the proper amount of SDLT payable has been difficult to say the least.

HMRC have now however recognised that not all amounts which can be said to be attributable to the goodwill of a trade related property business are going to be subject to SDLT and that each case is different.

This viewpoint has been put forward by advisers for some time and it is easy to see why.

 Take 3 hotels.The Hotel du Vin in Birmingham City Centre and the Hotel at Scotch Corner and Lumley Castle Hotel in Chester Le Street, Durham.

The “Hotel Du Vin” is a well-known upmarket hotel brand it is easy to see that people may choose to stay in the Hotel Du Vin not because it is the only hotel in Birmingham but because of its promise of excellent service and its general brand reputation. The Hotel at Scotch Corner is a convenient stop off for travellers breaking their northwards journey. It can be argued therefore that people stay there because of its location rather than the hotel service itself (although of course if you took away the hotel business you would be left with just a moderately large building off a very busy roundabout) and Lumley Castle Hotel will hold special attraction for visitors and indeed any buyer because of its historical interest.

Looking at goodwill on these businesses the issues therefore are that it is arguable that the value of the goodwill of the Hotel Du Vin hotel business would be less attributable to the property itself and more to the brand name, the Scotch Corner Hotel must have to attribute some of its goodwill to its location and for Lumley Castle the hotel business must be almost all about the property itself.

There will remain lots of grey areas however, and HMRC aren’t really letting go of the right to argue the SDLT position with regards to goodwill. The situation really remains the same, a requirement to ensure that if you are buying a hotel, or a similar trade related property, proper consideration is given to the valuation, and in this complex area you really need a professional valuation, to ensure that the correct amount of SDLT is payable and the probability that you are still going to have to suffer enquiries and correspondence with HMRC whilst you agree it.

SDLT planning schemes - a note of caution

There are a good many companies out there selling SDLT saving schemes at the moment.

Some of these companies are excellent and some not so.

I have had recent discussions with HMRC who work very well with the providers that genuinely manage a "good scheme" but they have told me some chilling stories about the clients who are now having to settle the SDLT bill rather than appeal because the scheme has been poorly managed and advised upon.

HMRC are very carefully analysing these schemes and even if the main legal arguments prove to be successful they will still pursue individuals who may not have had their scheme correctly implemented. They are also reporting implementing solicitors to the SRA who may be in breach of some of the conduct rules.

If you have been offered an SDLT mitigation scheme, how then do you tell the good from the bad?

• Is your adviser putting you fully in the picture about the risks? If they are making it sound fabulous and virtually risk free then avoid them. If you sense that they are almost putting you off doing it with stories of enquiries and investigations and how they will be managed then they are probably one of the good ones.
• Look at  the number of products they advise on generally -  including all types of taxes. Good advisers tend to have a handle on a number of tax planning areas and will be aware of property structuring generally.
• Ask about the adviser's professional background. If they have no appropriate qualifications and advise on a single scheme backed on one Counsel's opinion proceed carefully. Some of these opinions have not been directly obtained, and have, I have been very reliably informed, been doctored to remove some of Counsel's caveats to the advice so that the scheme is easier to sell and implement on the smaller transactions!

I can suggest a number of good advisers if you want to ask. I am also happy to advise independently on merit and likely risks if you think that might help your decision. Some client's feel happier enter into planning schemes if they know exactly what they are letting themselves in for.

I am not here to say whether you should or shouldn't do schemes and in fact as some of them are based on technically meritous legal arguments they are certainly worth a shot.

The following story may however, highlight the danger of not using an adviser who is technically competent in the field of SDLT.

A non domiciled investor has recently completed the purchase of 9 flats from a developer for £3.8 million using an aggressive SDLT sub-sale planning scheme.

They were informed by the Estate Agent, Solicitor and the Scheme Adviser that the SDLT would be chargeable at the rate of 5% but, that they could get the rate down to 2% (plus VAT on their fee).

The client signed up to pay £91,200 ( including the VAT) for the planning advice thinking that they were saving about £100,000.

Sadly, neither the Estate Agent, Solicitor or Scheme Adviser informed the client that due to the bulk purchase relief for residential purchases their SDLT liability was actually only 3% not 5% (£114,000).

So in actual fact the client is only saving £22,800 and that is if it works!

Worse still, the client who is neither domiciled or resident in the UK  has proceeded on the basis of  acquiring and holding the property personally. No-one has advised correctly on CGT and IHT planning and these tax risks could amount to far more than the SDLT which may be saved.

So, this is a note of caution. Yes I think it is worthwhile carrying out a scheme in certain cases but your key to making it worthwhile and having the best chance of success depends on your adviser and choosing a good one is therefore crucial.

VAT savings with Design and Build Structures Remain Possible

It has been possible for sometime to structure a new build project as a "design and build structure" enabling significant savings on the VAT charged on the services of architects, surveyors and similar professional services where the build element qualifies for zero rating.

HMRC attempted to stop this by arguing that the "design" element was a separate supply and chargeable to VAT at the standard rate. Fortunately, as a result of industry lobbying, HMRC have now conceded the point and will allow design and build structures to be treated as a single composite supply.

The ability to structure contracts this way is very useful for build projects where there is unlikely to be any VAT recovery for the client. Therefore Housing Associations, Charities and Self Build Individuals will be pleased with this news.

Please do contact me if you need any further advice.

Start Reviewing Your Brownfield Sites Now.

Many are aware of the Government's plans to abolish Land Remediation Relief (LRR) in next year's Finance Act and it is thought that the relief will be lost from 2013.

The availability of LRR, which gives a Corporation Tax Relief of up to 150% on clean up costs (including the cost of cleaning up and removing Japanese Knotweed), is valuable to developers looking at so called brownfield sites. The loss of LRR therefore will adversely affect the GDV calculations on acquisitions of contaminated sites and may hinder purchases or at least cause a sudden drop in the price attainable for them.

Whilst the Government's argument that the relief isn't effective is a highly contentious one, Owners of contaminated sites and developer's need to start acting on the basis that the relief will be lost within the next 2 years.

In particular, developers may need to consider actioning the clean up of any contaminated sites in their land banks as soon as possible or at least start revisiting the potential development values they have attributed to these sites.

Advice for developers relating to SDLT on exchanges

Its a common situation,

Developer enters into a contract for the purchase of a site from a large supermarket chain.
Developer is to pay £10 million to the seller, construct a new store and grant a 999 year lease back of the new store to the supermarket at a peppercorn rent. The contract is conditional upon planning.

Developer, budgets for SDLT on £10 million.

Developer's solicitor advises that as a result of the leaseback to the supermarket this is now an exchange and SDLT is chargeable on open market value on the date that the contract goes unconditional. The open market value of the land with the benefit of the planning (achieved at the cost of the developer) is now £15 million.

Ouch that means at least an extra £200,000 of SDLT*

Could this have been avoided? - Yes!
Using a fancy scheme that messes up an already difficult set of negotiations? No!

A simple piece of drafting can save the additional £200,000.

If you are interested in how something similar to the old build licence route could save all the SDLT then I can help with that too - but obviously this doesn't always work commercially or for the seller's tax position so it needs to be considered early.

You can contact me at sharron.carle@keystonelaw.co.uk


HMRC are still deciding at the moment whether there is VAT on market value calculations. Their manual says not but this is under review. 

The Stamp Duty Land Tax (Administration) (Amendment) Regulations 2011

On 16 November 2010, HMRC announced that they would be making changes to the information that must be supplied on SDLT returns. The changes reflect HMRC's new SDLT management system which is focused more on identifying the customer rather than just the transaction.

Companies already need to include their company registration number, UTRN and their VAT registration number but from 1st April 2011 individuals will also need to provide their national insurance numbers.
There are transitional provisions which allow the old forms to be used up until 4th July 2011.

Both the paper form SDLT1 and its online equivalent will change.

The regulations were published on 22nd February 2011 and are available to view here.