The Gazette 1982

GAZETTE

APRIL 1982

interest in the site to the nominee of the builder. The liability will extend to the fine and to the value of the in- terest assured. V.A.T. Chargeable Perhaps the first point to be remembered under this heading is the fact that the charge is made on a propor- tion of what might be termed "the relevant figure". This proportion has varied from time to time since the introduction of the legislation, and currently stands at 20%. The balance is deemed to be zero-rated. An exception to the foregoing arises where there is an election to waive the exemption on rental income. The resultant tax is chargeable on the full rental rather than on a proportion of same. The means of establishing the relevant figure differs according to the nature of the transaction as will be seen from the following list of examples: - 1. In sales and kindred matters, it is the considera- tion receivable viz. the capital payment "including all taxes, commissions, costs and charges what- soever, but not including value-added tax chargeable in respect of the supply". In taxable self deliveries, the relevant figure is the tax-exclusive cost of development plus the cost of the site. In the case of a reversionary interest it is the value thereof ascertained by deducting the value of the interest disposed of from the value of the full in- terest at the time at which the disposition was made. It will be remembered that where the in- terest disposed of is not to revert within twenty years, the reversion is deemed to be valueless. In Leases (not ranking as "self-supplies") the rele- vant figure is the deemed capital value of the rent created, same being ascertained according to whichever of the following methods produces the lowest figure: - (x) valuation (open market basis) by a competent Valuer. (y) three-quarters of the annual amount of the rent multiplied by the number of complete years, for which the rent has been created. (z) by multiplying the initial annual rent by a fraction having 100 as its numerator and, as its denominator, the yield to redemption of the Na- tional Loan (redeemable not less that five years from issue) last issued before the creation of the rent. 5. In cases which combine, say, a fine and a rent, the relevant figure will be the aggregate of the amount of the fine and the deemed capital value of the rent. The following further points should be remembered: - (a) In establishing the capital value of rents only method (x) above may be utilised, where there is provision for an increase of rent within five years of the grant of the relevant Lease (because, for ex- ample, of an intervening review or because the rent is to be calculated to accord with turnover or profits). 2. 3. 4.

(b) After some official vacillation, it seems now to be accepted that the yield on foot of (z) supra is to be that ruling at the issue of the Loan rather than at the date of the Lease. (c) As matters currently stand, the lower rate (15%) of tax is to be applied to the chargeable element (20%) of the relevant figure, thereby producing an effective rate of 3%. (d) The last pertinent National Loan is the 1434% Development Stock 2002/04, which is understood to have had a redemption yield of 16.10% effec- tively converting the fraction at (z) into a multiplier of 6.21. (e) Because of the different methods of computation, (some being founded in value and others in cost) the foregoing examples may well produce results, which superficially may appear to be contradic- tory. (0 The foregoing examples may (assuming the application of the principle of V.A.T. exigibility) be exemplified by the following figures: - A Straightforward sale for: Taxable element - 20%: V.A.T. @ 15%: B Self-supply Site cost: Development cost (exclusive of V.A.T.): £100,000 £20,000 £3,000 £10,000 £90,000 £100,000 £20,000 £3,000 C Lease - thirty-five years - rent reviews at five yearly intervals - initial yearly rent: £10,000 Under (x) above a valuation must be obtained, and let us assume that same produces a figure of: £140,000 Taxable element - 20%: V.A.T. @ 15%:

Under (y) we get - 34 x £10,000 x 35 Under (z) the formula produces -

£262,500

£10,000 x 6.21 Lowest = (z) = Taxable element - 20% = V.A.T. @ 15% =

£62,100

£62,100 £12,420 £1,863

Fixtures/Furnishings Where goods of different kinds and attracting tax at two or more rates are supplied under the V.A.T. regime for a consideration, which is referable to the entire and not segregated, there is a provision to the effect that tax is to be chargeable in respect of the whole transaction at the higher or highest of such rates. Premises are frequently let with fixtures and fur- nishings already installed, and at a rent which embraces the entire. It is in this area that a very serious problem can arise, particularly, of course, if the intending Lessee

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