HMRC SDLT: SDLTM03800 – Scope: How much is chargeable: Interaction with VAT FA03/SCH4/PARA2

Principles and Concepts of SDLTM03800

This section of the HMRC internal manual discusses the interaction between Stamp Duty Land Tax (SDLT) and Value Added Tax (VAT) as outlined in FA03/SCH4/PARA2. It provides guidance on determining the chargeable amount for SDLT purposes.

• Explains how VAT affects the calculation of SDLT.
• Clarifies the conditions under which VAT is included in the chargeable consideration.
• Offers examples to illustrate the application of these rules.
• Provides references to relevant legislation and guidelines.

Understanding Chargeable Consideration and VAT for Stamp Duty Land Tax

What is Chargeable Consideration?

Chargeable consideration refers to the total value involved in a land transaction that is liable for Stamp Duty Land Tax (SDLT). This includes:

– The purchase price of the property
– Any additional payments or considerations such as rights granted or costs assumed by the buyer
– Value Added Tax (VAT): If VAT is charged on the transaction, this amount is included in the chargeable consideration. Importantly, even if the VAT can be recovered from HM Revenue & Customs (HMRC) as input tax, it still counts toward the total.

VAT and Land Transactions

Key Point: If a landlord decides to change the VAT status after a lease has already begun, any VAT they add later does not count as chargeable consideration.

For example, if a tenant has a lease and the landlord decides to opt in for VAT after the lease starts, any new VAT added to the rent is not considered chargeable.

Transfer of a Going Concern

In some cases, businesses may transfer a ‘going concern’ – meaning that they’re transferring the entire operation, including assets like property.

If a transfer meets specific conditions under VAT laws:

– No VAT is payable on the sale
– The chargeable amount is then calculated without including any VAT (this is known as VAT exclusive).

However, if the conditions are not met and VAT is applicable:

– The chargeable consideration includes the VAT amount, making it VAT inclusive.

Impact of VAT Rate Changes on SDLT

When a VAT rate changes, it’s important to know that the chargeable consideration used for SDLT should be based on the VAT rate that was effective at the time of the transaction. This means:

– If the rate changes after the effective date of a transaction, it does not affect the SDLT calculation, and no new return is required.

Leases with Changed VAT Rate

Lease Effective Date on or After Rate Change:
For leases where the effective start date is the same as, or after, the VAT rate changes:

– To calculate the Net Present Value (NPV), use both the old and new VAT rates.
– From the lease start until the rent due date right before the first payment after the VAT change, use the old VAT rate.
– For rent payments made on or after this first new due date, apply the new VAT rate.

Lease Effective Date Before Rate Change:
For leases where the effective start date is before the VAT rate change:

– You do not need to file a new return just because of the VAT rate increase.
– However, for leases that have variable or uncertain rent, a new return may still be necessary based on existing rules.

In such cases, you still need to review rents paid. This review must account for VAT at the rate effective at the time of each payment. The calculations should focus on:

– The highest rent paid over any 12-month period during the first five years to adjust for the whole remaining term of the lease.

Any returns resulting from this review will have a new effective date based on:

– The end of the fifth year of the lease, or
– When the rent becomes certain.

It’s essential to note that, despite the revised effective date for various purposes, interest charges on unpaid tax will still reference the initial effective date. This means:

– If SDLT is underpaid, interest applies from the original date.
– When tax is overpaid, interest is added at the original effective date as well.

HMRC Rulings Post-Transaction

If HMRC provides clarity regarding VAT on a particular transaction:

When VAT is Confirmed as Chargeable:
– If the buyer did not include the VAT in their initial SDLT calculation,
– They must amend their land transaction return according to FA03/SCH10/PARA6.
– Any additional SDLT owed on the VAT should be included with this amendment.

When VAT is Confirmed as Non-Chargeable:
– If the buyer initially included VAT in their SDLT return,
– They are required to amend the return according to FA03/SCH10/PARA6 and request a refund for the excess SDLT from the Stamp Office.

Specific Situations and Examples

Example of Chargeable Consideration with VAT:
Consider a sale of a commercial property priced at £300,000, with an applicable VAT rate of 20%. If the seller charges VAT of £60,000:

– The total chargeable consideration for the transaction is £360,000 (£300,000 purchase price + £60,000 VAT).

Example of a Going Concern:
A fully operational café, with its premises and assets, is sold for £500,000. If the sale qualifies as a transfer of a going concern, which meets all VAT requirements:

– No VAT is charged on this transaction. Therefore, the chargeable consideration remains £500,000.

However, if the café transfer does not qualify:

– And if VAT of £100,000 is applied, then the chargeable consideration would now be £600,000 (£500,000 + £100,000 VAT).

Common Misunderstandings

– Some sellers may think that simply because a business operates as a going concern, they won’t incur VAT. This is only true if they meet the specific legal requirements for such transactions.
– Buyers often believe that changes in VAT rates immediately determine new SDLT amounts. Instead, their obligations are based on the VAT rate in effect at the time of the transaction.

Conclusion

It’s essential to approach the interaction between VAT and SDLT with clarity. By understanding when VAT impacts chargeable consideration, how to deal with rate changes, and the process for handling HMRC rulings, both property buyers and sellers can navigate their obligations effectively.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM03800 – Scope: How much is chargeable: Interaction with VAT FA03/SCH4/PARA2

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