Tax Plan 2024: the VAT and transfer tax measures

The caretaker government is abolishing the reduced rate for agricultural inputs and narrowing the overlap exemption on property share transactions. Other choices it leaves to its successor.

The caretaker government published its tax plans on Budget Day. Below we set out the proposed VAT measures and the related transfer tax measures. All of them must first be approved by both chambers of parliament. We also look at some measures the government is leaving to its successor.

Abolishing the reduced rate for agricultural inputs

It is proposed to abolish the reduced rate from 1 January 2025 for agricultural inputs, namely:

• cereals and pulses that are not foodstuffs
• seed potatoes intended for growing vegetables and fruit
• cattle, sheep, goats, pigs and other animals evidently intended for producing foodstuffs or for use in agriculture, animals intended for breeding them, offal from those animals and goods intended for their reproduction
• beet
• agricultural and horticultural seeds used for growing products and oilseeds falling under the reduced rate
• roundwood
• straw and animal feed
• raw, unwashed wool

The reduced rate was chosen at the time because farmers were covered by a special agricultural scheme under which their supplies were exempt and VAT on inputs was not deductible. The reduced rate prevented a heavy VAT burden on their costs.

That scheme was abolished on 1 January 2018. Farmers can now deduct the VAT on inputs in full, unless they apply the small business scheme. Abolition therefore does not increase their costs, but from 1 January 2025 they will have to pre-finance more VAT: 21% instead of 9%. The VAT normally only comes back after they have paid it to the supplier.

Reconsidering reduced rates and a zero rate on fruit and vegetables

The government commissioned an external agency to carry out a broad evaluation. The main conclusion of the report sent to parliament this spring is that reduced VAT rates are generally not an effective instrument for achieving their intended aims, such as lowering prices, boosting employment or supporting a particular sector. The government leaves it to its successor to decide on retaining, narrowing or abolishing them.

The government also informed parliament this spring about research into introducing a zero rate on fruit and vegetables. The conclusion is that such a rate is not a suitable measure for encouraging consumption. It is therefore important to look at alternatives, such as targeted subsidies or providing free fruit and vegetables more widely in schools to those who need them. That decision, too, is left to the next government.

Narrowing the overlap exemption on property share transactions

In earlier articles we flagged the intention to remove the overlap exemption where new property is acquired through a share transaction. The government considers it undesirable that the transfer of a new building is treated differently depending on whether the bricks are transferred (21% VAT with the overlap exemption) or the shares in the property company (no VAT, with the overlap exemption).

It is proposed that from 1 January 2025 the overlap exemption no longer applies to the transfer of new property through a share transaction. That applies only where, in short, a third or more of the shares are transferred, so where a substantial interest changes hands.

To avoid overreach there is an exception: the overlap exemption continues to apply where the buyer uses the new property at least 90% for supplies carrying a right to deduct for two years after acquisition. That conditional exception matters above all for commercial property.

To prevent new property failing that 90% test, such as housing or care property, from bearing both non-deductible VAT at the level of the property company and 10.4% transfer tax on the share transaction, the government proposes a new reduced rate of 4%. From 1 January 2025 there will then be three rates: 10.4%, 4% and 2%.

Transitional rules apply to transactions where seller and buyer agreed the intended acquisition before 19 September 2023 at 15:15. The inspector can then be asked to apply the overlap exemption, provided that:

• the request is made within three months of 1 January 2024
• at the time the agreement was concluded it is plausible that the transaction was not principally aimed at qualifying for the overlap exemption