VAT: Is VAT payable on my overage payment?
Developers acquiring land often agree to pay an initial purchase price with additional overage payments payable at a future date dependent on things like planning permission or, linked to the sale of completed houses on the land acquired. If the seller of the land has opted to tax it for VAT purposes, VAT will typically be payable on the initial sum paid but not necessarily on any overage payments.
The VAT position of overage payments needs to be considered each time an overage payment is made and it is possible that events after the initial purchase of the relevant property could alter the VAT liability of an overage payment. For example, a developer that has acquired bare land and since built housing on it, should not be subject to VAT on any overage payments made if the overage is linked to the sales of completed houses and is paid after the houses have been built. This is because the seller’s option to tax is likely to be disapplied at the time the overage becomes payable.
The VAT saving may only be a cashflow saving for the developer but the stamp duty land tax (SDLT) that would otherwise be payable on the VAT will be a real saving, as SDLT is payable on VAT regardless of whether such VAT is recovered from HM Revenue & Customs (HMRC).
HMRC has recently confirmed that they have reconsidered their position with regards to VAT and overages and they now say that the VAT liability of an overage payment is determined at the time of the original sale of the relevant land and is not altered by subsequent events. Taxpayers will however only be expected to apply this approach from a future date following the expected publication of a Revenue & Customs Brief. We are of the view that HMRCs’ new proposed position is questionable.
If you have any queries concerning VAT and overage, our tax team are happy to assist you.