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Implications of the Goods and Services Tax (Jersey) Law 2007 on Commercial Property Transactions

The Goods and Services Tax (Jersey) Law 2007 ("GST Legislation") will introduce a 3% Goods and Services Tax ("GST") to Jersey from 6 May 2008.

This is a major reform of Jersey’s tax structure and will have a fundamental impact on commercial property transactions carried out on the island.

Property Specific Supplies

All supplies made in Jersey by a taxable person in the course of business are to be taxable at the standard rate of 3%, unless the GST Legislation specifically provides that they are to be zero-rated or exempt.

Under the GST Legislation all supplies of interests in land and property are subject to GST attracting a standard 3% rate of tax. This includes rent, incidentals and sale proceeds of a building unless the building is a residential dwelling in which case the GST liability will be zero-rated.

Supply of residential accommodation
Zero-rated supplies are those goods and services that fall within the scope of GST, but for socio-economic reasons, are taxed at a zero rate. A registered business which supplies zero-rated items is able to reclaim any GST it incurs in the course of its business (i.e. the GST on raw materials and running costs). 

The provision of residential accommodation (i.e. the construction, sale, lease or rent of residential accommodation) is zero rated under the GST Legislation. However, leases or licences of residential accommodation with terms of less than 3 months will not be zero-rated and will attract GST liability at a standard 3% rate of tax.

Property Development
The GST Legislation provides for specific treatment of supplies relating to the:

  • construction of residential accommodation;
  • construction of mixed-use developments; and
  • redevelopment of commercial property into residential property.

Supplies of sub-contractors in construction work will be outside the zero rate and will attract GST liability at a standard 3% rate of tax.

Hotel accommodation
The GST Legislation also clarifies the GST treatment of the supply of hotel accommodation. Supplies made in respect of accommodation in hotels, guest houses, self-catering holiday accommodation and camp sites will be treated as zero-rated until the end of 2008.

GST treatment of commercial property transactions

The GST Legislation renders all supplies of interests in non-residential land and property subject to GST at a standard 3% rate of tax. 

In practice, this means the following property supplies will suffer GST at a standard 3% rate of tax:

  • Freehold sale of non-residential building
  • Separate grant of facilities for parking a vehicle at commercial premises
  • Any sale, grant or surrender of an interest in, or right over non-residential land
  • Payment of capital sum to prospective tenant to induce it to take up commercial lease
  • Grant of commercial lease for premium or rent and supplies under that lease
  • Payment for release of restrictive covenants or easements
  • Any sale of a non-residential leasehold interest in land or buildings
  • Grant of option agreements

The GST Legislation also has specific affects on the following commercial property transactions:

  • Grants of commercial leases with a term of less than 9 years
  • Grants of commercial leases with a term of more than 9 years
  • Reverse premiums
  • Assignments of leases
  • Assignment of onerous leases
  • Surrenders
  • Reverse surrenders
  • Lease variations and lifting restrictive covenants
  • Rental Guarantees
  • Rent-free periods
  • Dilapidations payments

Transfer of a rental business as a going concern ("TOGC")

The GST Legislation provides that the transfer of a business, or part of a business, capable of separate operation (i.e. a going concern)("TOGC") will be treated as a zero-rated supply. 

TOGCs are common place under VAT laws in the UK and GST laws in Australia and can be very important to commercial property investment transactions as they allow, in certain circumstances, for the sale of an investment property to be treated as a zero-rated supply.

International Services Entities ("ISEs")

Where a business is listed as an ISE one consequence is that it cannot be a taxable person for GST, even it has a taxable turnover in excess of £300,000. The consequence of this is that any supplies received by or made to an ISE will not be treated as taxable supplies. As such, the grant of commercial lease for rent to an ISE will not be a taxable supply.

However, a prospective ISE should be aware of a proposed amendment to the GST Legislation which will have the affect of excluding from treatment as an ISE a business where:

  • More than 10% of all supplies made by the entity are made to individuals who belong in Jersey, unless to other ISEs;
  • No individual who belongs in Jersey has the effective use, or the effective enjoyment, of any asset owned or administered by the entity; or
  • No individual who belongs in Jersey has the effective use, or the effective enjoyment, of any goods, or any services, supplied to or by the entity.

The proposed amendment being aimed primarily at preventing abuse of ISE status to the benefit of individuals in Jersey.

Grandfathering Provisions

The GST Legislation provides that where a lease was entered into before 17 August 2007, supplies under the lease will be counted as zero rated supplies for a period of five years from that date (that is, to 16 August 2012) or until the lease is varied, whichever is the earlier. A variation will not be held to have occurred if there is a contracted rise in the rentals due to RPI or market review of rents.

With regard to conditional contracts for sale or development entered into before 17 August 2007, it is understood that the affect of the grandfathering provisions under the GST Legislation will be considered by the tax office on a case by case basis. 

For detailed advice concerning GST and its implications on commercial property transactions in Jersey please contact  Jonathan Hughes .

The information and expressions of opinion contained in this guide are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.