VAT treatment of overage
Produced in partnership with Martin Scammell
VAT treatment of overage

The following Tax practice note produced in partnership with Martin Scammell provides comprehensive and up to date legal information covering:

  • VAT treatment of overage
  • Why does this matter?
  • What is overage?
  • Is VAT due?
  • General rule
  • Exception—freehold new buildings and civil engineering works
  • When is VAT due?
  • General position
  • Anti-avoidance rules
  • Subsequent transactions
  • More...

This Practice Note is about the VAT implications of overage payments.

Why does this matter?

Very broadly, VAT will be due on overage if the original sale giving rise to it was subject to VAT, and will only be payable when the overage is actually received, but there are notable exceptions to this. Sellers can therefore be faced with unexpected liabilities, and at unexpected times, and it is important that sale contracts recognise the correct position.

Also, HMRC does not comment in guidance, and there has been evidence of it failing to understand overage transactions, or their VAT treatment, so that it might challenge the position even if the VAT has been dealt with correctly. It will be useful to have documented the reasons for the treatment at the time, together with any advice taken.

What is overage?

Overage describes the position where a seller (typically, though not necessarily, of land) retains the right to receive from the purchaser an amount of additional consideration after the completion of the sale and payment of any initial consideration.

The right retained by the seller will typically consist of the right to receive an additional cash payment, though other forms of consideration (such as shares, or other assets) are possible. The payment may be paid once or on a number of separate occasions, generally dependent upon the occurrence of one or more events.


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