Rights to Light VAT on Compensation

Payment of compensation for infringing a property’s rights to light is the most common remedy, but what is the correct VAT treatment?

The short answer is that as a general rule, rights to light compensation should be calculated to exclude VAT. We set out below why this is the case.

Many of the most highly respected surveying and legal practices in the field of rights to light advice will have little idea of the correct VAT treatment of compensation.

Some will have standard policies in place to advise clients, with little idea as to why their advised treatment is correct.

A proper understanding of the treatment of Rights to Light VAT is important, particularly when advising clients who insure against the cost.

In such instances failing to consider the correct VAT treatment could increase the sum insured and the relevant premium by 20%.

Rights to Light VAT on Compensation & VAT Changes

Historically, and as a general rule, HMRC did not consider compensation payments for Rights to Light as being subject to VAT. This was on the basis that such payments were not consideration for a supply of goods or services.

Following two decisions from the Court of Justice of the European Union (“CJEU”) in MEO (C-295/17) and Vodafone Portugal (C-43/19) HMRC revised its position and issued Brief 12 in September 2020.

Controversially, this revised treatment was retrospective, and applied to compensation payments in the preceding four year period.

Unsurprisingly, businesses and advisers were quick to point out to HMRC the problems with this approach. HMRC reconsidered the position and after one more false start in January 2021, clarified the position, effective 1st April 2022. This is set out in HMRC’s ‘Revenue and Customs Brief 02 (2022).

New VAT treatment of Compensation

HMRC’s new general policy is to treat payments of compensation as further consideration for the contracted supply.

In plain English, VAT will apply to compensation if it applied to the original supply. If the original supply was zero rated or exempt, VAT will not apply to any compensation.

What does this mean for Rights to Light VAT on Compensation?

In considering Rights to Light VAT it is important to consider the type of property, and whether it is in domestic or commercial use.

Compensation for Domestic Premises

The sale or rental of domestic property such as a house or flat is exempt from VAT. This means that an individual or company purchasing a property would not be liable to VAT, and nor would a tenant paying rent.

Rights to Light Compensation for Domestic Property is Exempt from VAT

Compensation for Commercial Premises

As a general rule, the sale or rental of a commercial property such as a shop, warehouse, office or restaurant is exempt from VAT, meaning neither the individual purchasing the property or the prospective tenant would have to pay VAT.

If a commercial property is new (less than three years old) standard rate VAT would apply. However, the most common way to acquire a Right to Light is by prescription, after 20 years enjoyment.

Whilst there are some exceptions (see our Rights to Light Factsheet) it is unlikely that a new build property would be due compensation for a rights to light infringement in the first place.

Whilst this VAT exemption is beneficial for a purchaser, it also means that the vendor or landlord is unable to recover any VAT on related costs, which may be significant – see ‘Opt to Tax’ below

Rights to Light Compensation for Commercial Property is by default Exempt from VAT

Compensation for Commercial Premises – Opt to Tax

A commercial property owner can opt to charge VAT at the standard rate when they sell or lease their property.

If they choose to do so, they must charge VAT on everything relating to the property.

They are also then able to recover any VAT charged to them on costs relating the property.

Opting to tax can therefore provide a substantial benefit in some circumstances, such as in the event that the property has been subject to extensive refurbishment, with its associated costs.

Rights to Light Compensation to Commercial Premises that have exercised the option to tax is liable to VAT at the standard rate.

However, the recipient will be registered for VAT. In these circumstances any VAT charged will be payable to HMRC. It is likely the developer will also be VAT registered and able to recover any VAT from HMRC. As such, any VAT due will not increase the value of Rights to Light compensation for either party.

Rights to Light Compensation for Option to Tax Commercial Property is payable to HMRC

Conclusion Rights to Light VAT on Compensation

As a general rule, rights to light compensation should be calculated to exclude VAT.

Should compensation be due to commercial premises that have opted to tax, the value of VAT is payable to HMRC, and recoverable by a VAT registered developer.

VAT does not therefore affect the calculation of compensation, and any such valuation should exclude VAT.

This article is not intended to form tax or legal advice. You should always seek advise from a properly qualified VAT advisor appraised with the particular circumstances that apply to you.

If you need further help in this regard, please give us a call.