The impact of Brexit on property VAT
Friday 14 July 2017
By Ayuk Ntuiabane, Director – VAT, Equiom Solutions
Of all the areas of VAT that might change as a result of the UK’s impending departure from the EU, VAT on property may seem like one of the less volatile – after all, real estate is stationary by its very nature, so there are no cross-border concerns as there are with, say, aviation. The VAT place of supply for land-related supplies is as simple as ‘where the land is located’, which leaves little room for doubt. However, the assumption that property VAT would be one of the less impacted areas may prove to be false. As the Leave campaign was keen to point out, the UK Government will ‘take back control’ of legislation from the EU once March 2019 arrives, which includes the power to set whatever VAT rates it sees fit – and some have proposed that property may be an area in which the government seeks to exercise its new powers.
Of course, this all remains speculation at this point, but with the Article 50 talks now opening in earnest more concrete details should begin to emerge. For now, though, let’s speculate on what may lie ahead for UK property and VAT.
One factor that is not explicitly linked to VAT, but will inevitably have repercussions on the VAT revenue that the Government generates from property, is property prices. Will the rampant upwards march of London property values in particular continue post-Brexit?
There are potential arguments on both sides. More negative forecasts have predicted an exodus of businesses, seeking to maintain access to the Single Market, to other EU countries such as France and Germany, with London losing its prominence as an international financial centre. Indeed, there have already been announcements in the media of large financial institutions making just such plans; for example, JP Morgan is reported to be moving jobs from London to Dublin, Frankfurt and Luxembourg in time for ‘day one’ of Brexit. If this trend became widespread, such an outcome could depress London property prices, especially in the commercial sector, with a knock-on effect on commercial property development – and ‘new’ (less than three years old) commercial property is standard rated for VAT.
Whether this outcome is realistic may depend in large part on the progress of the Article 50 negotiations. Continued access to the Single Market would be the preferred outcome for the UK, but UK Prime Minister Theresa May has already stated that she is not prepared to cede control over movement of people to retain access to the Single Market. Conversely, the EU has indicated that its principles of free trade and free movement of people are indivisible.
Similarly, residential property prices may decline if net inward migration falls due to an exodus of jobs or the end of free movement of people from the EU, although this would not have such a direct impact on VAT receipts – however Stamp Duty Land Tax (SDLT) and Land and Buildings Transaction Tax (LBTT, effective in Scotland) receipts could also fall, were property prices in general to decline.
Thus far, economists’ more pessimistic projections have not been borne out by the results of the UK economy since the Brexit vote took place. Indeed, the fall in the value of sterling may have had some positive effects, making the UK’s exports more competitive and also making it a cheaper destination for foreign tourists to visit. Also, the UK Government will naturally want to keep the UK an attractive place for businesses to base themselves so may offer alternative incentives such as further reductions in corporation tax. The uncharted waters into which the UK sails are proving difficult to predict.
VAT on residential property
Currently the UK has little say over which VAT rates can be charged on different supplies. The EU dictates what can be zero rated. Residential property is currently generally subject to the zero rate, as is much new-build construction, but, in the UK, most repair work on existing houses by tradesmen is subject to VAT at 20%. An exception to this is renovation of long-term vacant properties, which is at the 5% rate or zero rated in some cases. There are suggestions that the UK Government may acquiesce to the wishes of the construction industry and bring all repairs of residential property into the 5% rate or even 0%. This would make residential property in need of renovation a more attractive proposition to purchasers, who in many cases would not be VAT registered and so could not reclaim VAT on the works. Therefore they could stand to save 20% on renovation costs if this change was implemented.
Properties in need of repair would be worth less and so would attract less SDLT if purchased in such a condition. If repair works were then 5% or zero rated for VAT, this could make buying older dilapidated properties a more attractive proposition for investors.
The harmonisation of the zero rate would also level the playing field for construction companies, which are currently uncompetitive against sole traders who operate below the VAT threshold.
As a side note, domestic property repair is one of the few areas in which VAT in the UK and Isle of Man differs. In the Isle of Man, these supplies are subject to the reduced rate (5%), so it would be interesting to see whether the Isle of Man would follow suit if the UK widened the scope of the zero rate.
VAT on commercial property
We have discussed above how commercial property prices may be affected by Brexit, but there are further considerations regarding how VAT on commercial property may be impacted.
For instance, companies involved in international trade are likely to be affected as the UK will no longer be inside the EU. As a result, the advantages of intra-EU trade will no longer apply. Currently, business to business sales from the UK to the EU are zero rated in the UK. This will remain the case post-Brexit, but the customer in the other EU country may have to pay the local VAT on delivery and later reclaim it through their VAT return, potentially creating a cash flow issue. This may result in UK companies moving their warehouses to the EU, thus affecting the value of UK warehouses.
Conversely, sales to non-VAT registered consumers in the EU are generally subject to VAT in the UK. However, where a business exceeds another EU country’s distance sales threshold, they must VAT register in that other country. After Brexit the ability to register locally for VAT will not be available and UK-based distance sellers will have to tell their customers to pay the local VAT when the goods are delivered to them. This is an unattractive prospect and may again lead to warehouse operations being moved to the EU.
There are unlikely to be wholesale changes to the VAT system or rates post-Brexit, especially in the short term, as businesses are now accustomed to the VAT accounting process and any major change would likely cause unnecessary upheaval. Moreover, the UK, even as part of the EU, has the power to change its standard rate of VAT, and the current 20% rate is a relatively competitive one among the EU bloc.
However, where the UK will have control that it does not as a member of the EU is in the ability to choose what supplies are subject to reduced rates or the zero rate, and we have illustrated above some areas relating to property VAT in which changes may be phased in gradually once the UK is no longer an EU member state.
As ever, the post-Brexit future remains uncertain. The most likely scenario immediately following the UK’s withdrawal from the EU is that property VAT will largely stay the same at first, but with the UK Government having more power to choose the VAT rate they deem appropriate, change will inevitably come.
For further information about the impacts of Brexit on property or to learn how Equiom can help you, please contact Ayuk Ntuiabane or Richard McGlashan. To read other articles in our Brexit and VAT series please click here.