Brexit, VAT and property values
This article is for general information only. You should only act or refrain from acting after receiving full professional advice on the facts of your particular case. This article does not constitute investment advice.
There has been a lot of speculation about how London residential property prices will be affected post Brexit, which seems to turn on whether an exodus of highly paid people in the financial services sector materialises. A far less discussed area, but one with much more importance, is the effect on UK property of the inevitable post Brexit VAT changes.
This article discusses the Brexit VAT implications on residential property where the outlook seems positive and commercial property where it appears negative. As an example the impact on warehouse property is given.
Rates of VAT
At the moment the UK has almost no power to decide the VAT rates to be charged on different supplies. The EU decides what can be zero rated. This is likely to change and the construction industry could be affected.
Effect on prices of residential property
Most repair work on houses by builders is charged at 20%. There are anomalies here and opportunities for sharp practice by some contractors. There is a lot of pressure on the government from the construction industry for reform. Expect this VAT rate to be reduced, possibly zero rated to bring it into line with renovating long term vacant properties. This will make “tired” residential properties more attractive to buyers who are currently not able to recover the 20% VAT in most cases.
Buy to let investors facing punitive Stamp Duty Land Tax Charges may decide it is better to buy cheaper properties requiring works rather than newer properties as the definite savings on SDLT and the possible VAT savings on building works will make these cheaper overall to buy.
Effect on prices of commercial property
Occupiers of commercial properties may be affected by VAT rate changes post Brexit which will have an effect on the value of their covenant and accordingly the value of the rented property. Zero rating of goods sold by a tenant to consumers will reduce the cost of their sales by 20% and boost their turnover and profits. This is more likely than the reverse situation of a VAT increase.
Conversely landlords and managing agents may want to start thinking now about whether tenants are likely to be adversely affected by Brexit VAT changes. Companies involved in international trade are most likely to be affected. This is a very complex area affecting sales of goods and services and each situation needs to be considered carefully in the light of possible Brexit changes. As an example the sale of goods from a warehouse is given below.
Warehousing as an example
At the moment sales by UK companies to businesses in the EU are zero rated for UK VAT purposes. The customer in the other EU country accounts for the VAT there in its VAT return and generally recovers the VAT as input tax so there is no cash flow issue. After Brexit the UK will no longer be in the UK. The sale of goods to the EU will still be zero rated in the UK but the customer in the other EU country will in most cases have to pay the local VAT in cash on delivery. This will be recoverable by the customer as input tax in due course but there will be a significant cash flow issue for the customer as the VAT on arrival of the goods will have to be paid up front. If the position stays like this post Brexit, companies in the UK are likely to move their warehousing to within the EU affecting the value of UK warehouses. Tenants negotiating warehouse deals at the moment should be asking for tenant only break clauses say 6 months after Brexit in case they need to relocate to within the EU.
If you sell to consumers (not VAT registered customers) in the EU you charge VAT in the UK just like sales to UK customers. However if you go over a certain threshold of “distance sales” in an EU country you have to register for VAT in that country and pay VAT there at their rates. Any substantial UK company will fall into this category and have to register for VAT in their principal EU markets. Post Brexit this option of registering locally for VAT will not apply and UK based distance sellers will have to tell their customers to pay the local VAT when the goods are delivered to them. This will be very unattractive to UK based distance sellers who are likely to move their warehouse operations within the EU.
The effect of Brexit on VAT is complicated but is predictable. It is going to be very difficult for the UK within 2 years to get all the remaining EU countries to change their VAT rules and procedures to accommodate the UK as a special country outside the EU. There was no discussion about VAT in the government’s recent White Paper on Brexit which indicates everyone knows big problems lie ahead. Businesses are unlikely to wait very long and risk losing customers in the EU to other EU based competitors who will have an obvious commercial advantage. This is going to affect commercial property values in the UK.
Tenant companies involved in international supplies of goods or services should think carefully about how their operations could be affected by VAT post Brexit. Flexibility is the key here with tenant only break clauses after Brexit in case they need to relocate to within the EU.