The application of the VAT exemption to land and property transactions is complicated. HM Revenue & Customs (HMRC) has an ongoing consultation aimed at simplifying the exemption.
The exemption from VAT is subject to a host of exceptions, including in respect of self-storage, the rules for which were subject to some change nearly 10 years ago. The change resulted in a grant of facilities for the self-storage of goods being automatically subject to VAT at 20%. Unfortunately, the outcome has been far from simple in terms of how the rules should be interpreted. For rural businesses, letting land and agricultural buildings which are used for storage purposes, it can be difficult to determine the correct VAT treatment to apply.
The starting point when considering the appropriate VAT treatment is the ‘facility’ itself. For the income to be subject to VAT, the storage has to be provided in a fully enclosed building, unit (or similar structure) or a container. This would include storage space in barns, grain stores, commercial units but would exclude Dutch barns that are not fully enclosed and open-air plots of land.
Farmers with excess real estate often let out their barns to local businesses to use for storage of equipment, tools and materials. If the farmer is VAT registered, this income is subject to VAT even if the farmer has not elected to opt to tax the facility.
The next point to consider is whether the tenant is using the barn or unit for the purposes of ‘self-storage’.
The term self-storage is perhaps unhelpful here as it does conjure up images of large out of town ‘sheds’ in which a customer would rent a small lockable unit within for the purposes of storing their own possessions. For VAT purposes, self-storage simply means storage and the use of a facility for the purposes of storing goods. If the facility is only used for storing goods, then the position would appear straightforward and VAT is chargeable. However, if storage is not the only use of a barn or unit by the tenant, things get more complicated and if the storage is ancillary to the business being carried out from or within that facility, the supply may not be that of storage. In that case, the VAT position would revert to that of a leasing/letting of property which would be exempt subject to an option to tax.
When the law was changed nearly 10 years ago, HMRC took the view that the actual use of a facility for storage purposes was the determining factor with respect to the VAT treatment. Whether or not such use was intended by the landlord did not appear relevant, with HMRC maintaining that the onus was on the supplier to know whether their tenant was storing goods in the facility being let. Contractual terms can help here, however if a rental agreement does not specifically allow or indeed prohibit use for storage then there is an expectation that the landlord should know whether the facility being let is used for storage purposes in the hands of the tenant. Where the use of a facility is subject to change, its predominant use over time becomes important.
To add to the complexity, there are some exceptions to grapple with, including supplies to connected persons and to charities. The storage of live animals is also specifically excluded from automatically being subject to VAT under the self-storage rules.
The provision of space for open air storage, including that within facilities which do not qualify as being fully enclosed, is not a taxable supply on this basis, but it still could be for other reasons. An option to tax over the land would render the supply taxable, but if no such election has been made the supply would be exempt provided it comprises a leasing or letting of land.
Rural businesses should take advice on the VAT treatment of any ’storage’ income. Electing to opt to tax land or property would take away a lot of the uncertainty, however that is not always the best route. Having opted land and property on hand can sometimes be a burden for the owner when they come to sell in the future. The fact a grant of a facility for the purposes of storage is a taxable supply, though does mean that the VAT on costs incurred in repairing, maintaining, developing and improving the facility, can be reclaimed in full without needing to opt to tax. This can be of benefit if a facility is developed with storage in mind, so that it is likely to be used for that purpose for the long-term.
There is a lot to think about when making spare barns, units, containers, or other parts of a farm or estate, available for use for storage purposes and taking advice is strongly recommended to ensure VAT is charged and collected where applicable, and that the VAT recovery position is consistent with that.