Developer creates unwelcome VAT cost on property deal
Property deals can often involve more than two parties. It is not uncommon for A to agree to sell a property to B and then before completion B agrees to sell on to C. There are various ways this can be achieved but recently one developer’s decision to novate the original contract of sale resulted in an expensive VAT bill.
In the case of Hanuman Commercial Ltd ( TC 06249) the developer had exchanged contracts on the purchase of an office building for £2.8 million from Sabre Insurance Co Ltd (“Sabre”). The intention was to convert the building into flats. Before completion of the contract Hanuman Commercial Ltd (“Hanuman”) entered into a further contract to sell the property for £5.5 million to a third party, Connect Centre Ltd (“Connect”).
Although Sabre had opted the building to tax Hanuman did not exercise an option in relation to the building.
Before the completion of either contract Hanuman, Connect and Sabre entered into further agreements varying the terms of the contracts such that the sale would be direct from Sabre to Connect for £2.8 million, and that Connect would pay a further £2.7 million to Hanuman. The new contract terms were achieved by way of a deed of novation that effectively replaced the original contract between Sabre and Hanuman; the contract between Hanuman and Connect was varied so that there was no longer any agreement to sell the property but an obligation to enter the novation agreement.
Hanuman originally charged VAT on the invoice to Connect for the £2.7 million but then tried to issue a credit note for the VAT of £540,000 claiming that the supply should have been exempt as it was in respect of the transfer of an interest in land that was not subject to an option to tax.
HMRC did not accept the credit note and Hanuman appealed to the Tribunal. The Tribunal recognised that the original contract between Hanuman and Sabre had created an equitable interest in the property for Hanuman; however, by the terms of the novation agreement, Hanuman had replaced the original contract with a new contract between Sabre and Connect and so its equitable interest in the property no longer existed. Hanuman did not have an interest in the property that it could transfer and so the £2.7 million charged to Connect must be consideration for the right to enter into the new contract with Sabre under the novation agreement, and was therefore standard rated.
The moral of this tale is that complicated property deals can have complicated and unexpected VAT consequences. The VAT aspects of any property deal should be considered carefully before action is taken.