Page 7 - Demo
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3. Taxing the Overage
This is an area which should be considered at the outset and applied to both parties circumstances at the time by their respective tax advisors and reflected in the heads of terms. We only note here some points to consider before the principle of overage is agreed:
SDLT: will be applied on the basis that the overage is part of the purchase price and will be charged at the time of completion of the purchase (with a reasonable estimate being made of uncertain or unascertainable consideration). An application may be made to defer the payment of SDLT on the overage in certain circumstancesii until such time as it can be confirmed (and if there is no overage due at a later stage then there will be no further SDLT) but the time limit for applying for the postponement will be strictly applied. If the overage is payable in tranches, then this will need to be addressed and SDLT paid accordingly. HMRC may or may not allow an application for postponement depending on the circumstances, so you should make sure that this additional SDLT is accounted for in your appraisals.
SDLT: note that the responsibility for making an additional SDLT return and paying any additional tax remains with the original developer, even after it has sold the property.
VAT: An overage payment is treated for VAT purposes as further consideration for the original supply of the land, and as such its VAT treatment should follow that of the original transaction. For example, if the original sale of land was exempt then the overage payment should be seen as further consideration for an exempt supply. If the original transaction was a taxable supply of land, then the overage is further consideration for that taxable supply. A complexity arises however which dictates that the tax point for assessing the overage payment’s VAT classification is the date the payment is received or invoiced. This means that if by the point of payment the VAT classification of the land has changed, (for example because an option to tax has been made), then the overage payment will be treated as consideration for a taxable supply. There are exceptions to this general rule for overage in respect of a new non-residential building or land on which one is to be
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