How is VAT to be taken into account?
Before FA 2011 where an exchange of land involved a freehold or a lease each party paid SDLT based on the market value of the land they acquired. FA 2011 changed this by charging SDLT on the value of what is given for the land acquired, if that is greater than the market value of the land acquired.
Although announced by HMRC as an anti-avoidance measure, the background to this change relates in part to sales and leasebacks. In a sale and leaseback transaction there is in SDLT (but interestingly not in CGT) an exchange and prior to FA 2011 the outward leg was taxed on market value. Where this sale was subject to VAT some taxpayers also included the VAT in the market value amount on which they calculated the SDLT. HMRC do not include VAT in market value for SDLT purposes and so these taxpayers later realised they had overpaid SDLT and made repayment claims. HMRC’s response was initially to resist these claims but they subsequently conceded.
Although in SDLT “market value” does not include VAT (HMRC practice explained in SDLTM 04140), “chargeable consideration” does include VAT chargeable “in respect of the transaction”: para 2 Sch 4 FA 2003. Hence in applying the “greater of test” you take the market value (ignoring any VAT) of what is received and compare that with the value of what was given but including any VAT chargeable in respect of the transaction. The inclusion of VAT in the computation can be confusing because VAT may be charged on the property being acquired as well as on the property being given in exchange as consideration. Which amount of VAT do you include or indeed should both amounts be included?
HMRC’s published guidance on the point seems cryptic:
“Budget 2011 change
Following the changes to the exchanges rules in the Budget, the point is of less significance although it may still be relevant in a small number of cases. In addition to the market value of the interest acquired (which will not include VAT), you must now also look at what was given. The chargeable consideration determined by looking at what was given does include any VAT paid. This means that the policy on exchanges is consistent with other transactions where VAT is paid.”
The key to understanding how the VAT is factored into the SDLT calculation lies in the phrase “in respect of the transaction”. I was initially attracted to the idea that the reference to “transaction” meant the transfer given as consideration in return for the property received. I then wondered if “transaction” should mean the entire exchange hence the VAT on both legs should be included. However I think that it means the transfer to the purchaser who transfers a property by way of consideration in exchange.
To make sense of this we can take an exchange of properties where both are standard rated supplies and each party has agreed to pay VAT on top of the exchange transaction to the other. How does the new rule work? Let’s say A is transferring to B land worth 100 on which 20 VAT is chargeable and in exchange B is transferring to A land worth 90 on which 18 VAT is chargeable. Applying the amended exchange rule B is receiving land with a market value (excluding VAT) of 100 but he is giving A chargeable consideration consisting of land worth 90 plus (as deemed by para 2 Sch 4 FA 2003) the VAT chargeable “in respect of the transaction”. One might think that the VAT to be taken into account here is the 18 VAT chargeable on the land B transfers to A. However it seems that “the transaction” here must be B’s acquisition as purchaser (since that it what is being taxed) hence the VAT to be taken into account and added to the 90 value given by B to A will be the VAT chargeable on the supply by A to B ie 20. To work out the SDLT on the exchange you take the 100 value received by B and compare it with the 90 value given by B as consideration plus the 20 VAT chargeable on the 100 ie 110. B therefore pays SDLT on the 110 and not the 90. The 18 VAT charged by B on the transfer of the land worth 90 to A is it seems not relevant nor it seems does it matter that B may not actually pay the 20 VAT to A.
Section 47 FA 2003 seems to support this approach because it draws a distinction between the land transaction entered into by B as purchaser in consideration of another land transaction entered into by him as vendor. Hence the reference in para 2 Sch 4 FA 2003 to the chargeable consideration for a transaction including VAT can be taken as a reference to the land transaction under which B acquires as purchaser. It is not entirely clear though because para 2 Sch 4 FA 2003 refers to “a transaction” in contrast with section 47 which refers to “a land transaction”. One is left to ponder the significance of this distinction.