Careful consideration will have to be given to the implications of various tax requirements on the development and use of the asset project, particularly if the organisation who takes ownership of it is a registered charity.
The summary below is not comprehensive but provides an overview of the issues to help research and consider the implications of different taxes on the project and get the best out of professional advisors.
Value Added Tax (VAT)
Most business transactions involve supplies of goods or services and VAT is payable if they are
- supplies made in the United Kingdom (UK) or the Isle of Man;
- by a taxable person
- in the course or furtherance of business and
- not specifically exempted or zero-rated.
Currently there are three rates of VAT (a standard rate of 20%, a reduced rate of 5% and a zero rate).
Capital costs and VAT on land
VAT rates on construction works vary according to the building use being created (for example buildings for some uses that are new attract zero rating), the status of the building (for example whether it is listed) the nature of the construction work (whether it is refurbishment or new construction) and whether a registered charity is involved.
Dealings with land are generally exempt from VAT although some can be standard (eg grants of rights) or zero-rated (eg residential or charitable and first grant of property, new property, conversion from commercial to residential or listed and substantially reconstructed).
It is, however, possible to "opt to tax" property the "supply" of which would ordinarily be exempt, and VAT would be payable. In such circumstances a charity can, before the transaction settles, serve a certificate on the owner or landlord disapplying its option to tax. The charity would have to keep using the property for "relevant charitable purposes" (ie it couldn't, for example, hire out a hall for income).
Any charity should, therefore, check the VAT status of the property immediately and consider (a) the purposes to which the property will be put, and (b) that disapplying the option to tax may make the transaction a less attractive prospect for the owner or landlord (due to irrecoverability or repayment of VAT).
VAT is payable at the standard rate for all professional fees associated with the development and construction process.
Reduced Rate supplies are things like:
- Domestic fuel or power
- Installation of energy saving materials
- Grant funded installation of heating equipment or security goods or connection of gas supply
- Renovation and alteration of dwellings
- Women's sanitary products and Children's car seats
Exempt or zero-rated supplies do include some aspects of construction and improvement of land and buildings and activities like betting and gaming, books, educational and training activities, food and catering and aspects of sport and leisure.
How the asset is used and the form of the organisation that will own it or run it will affect VAT applicable to revenue costs and income, and will therefore impact on the overall viability and sustainability of the asset.
This is a complex area of planning and implementation of asset development and transfer and it is recommended that professional advice is be obtained. That said, very helpful advice can be gathered from local VAT offices and there is a great deal of free guidance available.
Land and Buildings Transaction Tax
Land and Buildings Transaction Tax (LBTT) is a charge on land and property transactions. This tax replaced Stamp Duty Land Tax on 1 April 2015 (save for exceptions regarding certain contracts entered into on or before 1 May 2012). In the case of sales/purchases, LBTT is charged at increasing percentages on slices of the purchase price (ie not a single rate of tax applied to the whole amount). In the case of leases, residential leases are exempt from LBTT and commercial leases are subject to LBTT (taxed according to a calculation based on the rent payable, returns being required throughout the lease term). It should be noted that LBTT is payable on the amount chargeable plus VAT, and also that it might be possible to claim charitable relief. Funding may be available for LBTT on the purchase price of the property concerned.
(NB Tax rates quoted in these documents may change but general guidance remains relevant.)
Be aware that business rates are chargeable for non-domestic property. It is worth checking the rateable value of any asset prior to acquisition, and also calculating the potential rates liability. For an overview of business rates and non-occupied and charitable relief see https://www.mygov.scot/business-rates-relief/charitable-rate-relief/.
Local authorities have a certain amount of discretion in this area by virtue of the recent community empowerment legislation - see section 140 of the Community Empowerment (Scotland) Act 2015, which allows local authorities to reduce or remit rates with reference to the category of land, or areas, activities or other specified matters. The reduction or remission ceases on a change in occupation. Note that from 1 April 2017 vacant non-domestic properties will be brought into a water charging regime.