UK VAT on property barter transactions

Barter transactions can be easily missed. Each supply has its own tax liability, so VAT may be payable in respect of one side of the barter but not the other. Barter transactions pose the greatest risk to the recipient of a taxable supply who cannot fully recover the VAT charged, such as charities.

What is a barter transaction for VAT purposes?

The term 'barter' is used to denote a transaction where the consideration is not, or is not wholly, in money. There are many examples of property transactions where this is the case, some of which are obvious, such as a land exchange, and some of which are not so obvious.

A typical example of a barter transaction is where a tenant experiences financial difficulties and its landlord agrees to vary the terms of the lease to help with cashflow.

It is vitally important in the context of a transaction that any non-monetary consideration is identified as soon as possible, so that the VAT implications can be considered to avoid any unexpected costs.

Barter can often arise in property transactions involving charities, including universities or other educational institutions, and local authorities, who may have difficulty fully recovering any VAT payable, so any VAT payable represents a real cost.

What does the HMRC guidance cover and what does it say?

Revenue & Customs Brief 11/2020 covers the VAT implications of certain lease transactions.

It states that for VAT purposes, if the tenant does not agree to do anything in return for a rent concession, no supply will have taken place. The landlord will simply account for any VAT in relation to rents receivable on the varied basis.

The guidance also states that the tenant does not make a supply to the landlord just by agreeing to an extended lease. It follows that in such a case the agreement by the tenant will not be regarded as consideration given by the tenant for a supply by the landlord. If the tenant otherwise agrees to more than paying rent during the lease, such as the carrying out of works, there would usually be a supply both by the tenant and by the landlord.

The British Property Federation (BPF) approached HMRC to confirm the position in relation to the variation of break clauses as the original guidance was not clear. HMRC confirmed that where a tenant agrees to vary a break clause resulting in an agreement to pay rent for a longer period in exchange for a rent-free period, HMRC does not treat the tenant as making a supply for VAT purposes. However, where a break clause variation gives rise to anything more than an agreement to pay rent for a longer period in exchange for a rent free period, and the treatment is unclear, then a ruling from HMRC should be sought.

HMRC suggests that if VAT has been accounted for other than in accordance with the guidance, VAT returns should be adjusted and credit notes issued. In practice, this will not usually be necessary if VAT has been accounted for by the landlord and has been recovered by the tenant.

What are the VAT implications of property transactions not covered by the guidance?

In addition to lease variations not covered by the guidance, such as a landlord agreeing to a rent-free period in return for the tenant carrying out works to the property, there are numerous examples of property barter transactions, including:

• sale and leaseback transactions, insofar as these do not amount to a financing transaction;
• exchanges of land; and
• a purchase of land by a purchaser who agrees to carry out works on land owned by the seller.

It is not always a simple process to identify a barter transaction. For example, where services, such as the carrying out of works, are part of a development, it can be tricky to identify whether the works represent consideration or whether they are simply a consequence of the overall development.

How much VAT is due and when?

Each supply has its own tax liability, so VAT may be payable in respect of one side of the barter but not the other. This could be the case in relation to an exchange of land where one party had opted to tax but the other has not or in relation to a sale of land which is zero-rated in return for the supply of works which are standard-rated.

Where a supply is for consideration not consisting or not wholly consisting of money, its value is such amount in money as is equivalent to the consideration. Therefore, if land is supplied in return for works, the value of the supply of land is the value of the works and the value of the supply of the works is the value of the land.

HMRC confirms in its guidance that the value is the amount that the recipient of the supply would have been willing to pay in the absence of the barter, therefore making the valuation a subjective one. This has been confirmed by case law and so long as the parties agree the valuation in good faith, it is likely that HMRC would find it difficult to substitute another figure.

VAT is payable to HMRC by reference to the 'tax point', which is broadly the earliest of:

• the date that the goods are supplied or services provided;
• receipt of payment, which in the case of a barter will be the receipt of non-monetary consideration; and
• the date a VAT invoice is issued.

If land is sold in exchange for the receipt of goods and completion of the sale occurs on 1 March 2021 but the goods are supplied on 1 October 2020, the tax point for sale of the land is 1 October 2020. It may seem to follow that the tax point for the supply of goods would be 1 March 2021, but the tax point is also 1 October 2020 as the goods are supplied on that date.

In addition, from March 2021, building work is subject to a reverse charge which may be relevant to some barter transactions. This could mean that a supplier of building work as part of a barter transaction has to apply the reverse charge, rather than paying VAT over to the contractor, as recipient of that supply.

In practice however, it is anticipated that landlords and tenants will often be covered by an exclusion, for example as an end user or intermediate user, but the position should be analysed carefully, as such exclusions will not apply in every case.

Action points

Identify as soon as possible whether a property transaction involves any consideration which is non-monetary, whether this is expressly stated in any legal documentation or not.

If the transaction in question is a lease variation, confirm whether it is expressly covered by HMRC's guidance such that neither the landlord nor the tenant is treated as making a supply for VAT purposes. The guidance is limited to situations where a rent free period is given by the landlord in return for the tenant agreeing to extend the lease or waive a break clause, such that the tenant will pay rent for a longer period.

If the transaction is covered by the guidance, but was entered into before it was issued, it should be confirmed whether any adjustments to the returns of the landlord or tenant are required. No such adjustments will be required if both landlord and tenant charged and fully recovered VAT in relation to the supplies.

Any other transaction will require to be analysed in detail to confirm the VAT consequences and to avoid any unexpected costs occurring in accordance with the steps below:

• identify the supply being made by each party;
• identify the VAT treatment of each supply – whether exempt, zero-rated, reduced-rated or standard rated – and VAT status of the party making the supply – whether VAT registered or not, if not, whether the transaction requires that person to become VAT registered;
• confirm whether the party receiving the supply can recover any, and all, VAT chargeable;

• ensure that the valuation of the supplies is confirmed. It is often the case that the value of each side of the barter is the same, but this is not always true. As set out above, the valuation is a subjective valuation, namely what the recipient of the supply, acting in good faith, believes the consideration to be worth;
• confirm the tax point for VAT purposes, namely the time of supply, bearing in mind that the tax point for each side of the barter transaction may be different. Ensure the practicalities of VAT invoicing and payment of VAT – both of the input tax to the party making the supply and of the output tax to HMRC – are understood and agreed by the parties; and
• review any legal documentation effecting the transaction, ensuring that such documentation reflects the VAT position, including specifying the consideration paid for each side of the barter, setting out what happens if HMRC disagrees with any treatment by the parties or any uncertainty and importantly, setting out clearly the agreed valuation of the consideration being paid for each side of the transaction.

In the event that a barter transaction has been overlooked before the legal documents have been finalised, they should be reviewed to determine whether there is a standard gross-up clause which applies and what the contract provides in relation to the consideration payable for the barter transaction. A gross-up clause may be sufficient to allow each party to charge VAT to the extent payable, but may not be adequate in more complicated transactions.

Where a taxable person who is not able to fully recover VAT enters into 'standard' documents in relation to property transactions, the allocation of VAT risk should be expressly provided for, to seek to mitigate any unexpected costs.

This guide is based on an article by Christine Yuill and Richard Croker which appeared in Tax Journal on 11 September 2020.