By adding conditions of application to the VAT margin scheme that were not provided for by the legislator, the tax authorities are penalising property dealers who sell building plots resulting from a division of plots.
The case is anything but novel: a property professional buys from private individuals a built property on which a leisure plot depends, divides it up and then sells the built property and one or more building plots independently. The resale of the building land is subject to VAT, which the professional believes should only be applied to his margin, since he was unable to deduct the VAT on the acquisition, in accordance with article 268 of the General Tax Code. The administrative doctrine, however, intends to deprive the trader of the VAT margin scheme in the event that the goods acquired and sold are not identically qualified. This praeter legem or even contra legem position has given rise to numerous corrections…
This argument has gradually been abandoned by the tax authorities. Admittedly, the tax authorities have relaxed their position by requiring only that the legal classification of the asset acquired and the asset resold be identical⁹. However, this welcome softening was not enough for the lower courts.
The legal VAT margin scheme
The sale of building land by a taxable person is now subject to VAT: the taxable person charges VAT on the sale and deducts the VAT paid on the acquisition. So much for the principle. However, article 268 of the General Tax Code stipulates that the margin VAT system applies to ‘the supply of building land’ ‘if the acquisition by the seller has not given rise to a right to deduct value added tax’. These provisions are particularly clear: they do not provide for any restrictions due to a possible change in qualification. A building plot is a plot of land that can support buildings, and there is no need to look for further conditions, such as a prior division of the land register or a breakdown of the price so that its value can be separated from that of the built-up land in order to make it suitable for building. No interpretation is required: ‘if the acquisition of the land by the taxable person has not given rise to a right of deduction, VAT is payable on the margin’¹. A trader who acquires a property complex from a private individual, comprising a built-up building and a building plot that depends on the building, is therefore entitled to apply VAT on the margin when the building is sold.
An administrative doctrine that adds to the law…
However, in what should be no more than a commentary on the law², the tax authorities add a condition which, in their view, must be met in order to apply the VAT margin scheme: ‘it is only necessary to look at the system of acquisition for the purposes of determining the taxable amount for supplies of immovable property acquired and resold while retaining the same qualification’. In other words, if a trader acquires a built-up building on which a plot of land depends and resells the building plot after dividing it up, there would be a change of ‘qualification’ depriving him of the VAT margin scheme. Again on the pretext of commenting on a legal text that is nonetheless very clear, the administration does not hesitate to add that ‘as a general rule, a division of the land should be made prior to the transfer, making it possible to distinguish between the part of the right-of-way that is free of buildings that can be used as such, the sale of which will be taxed as building land, and the part that is already built on and can be used as such, the tax classification of which will depend on the specific characteristics’.
…And mishandles the principle of legality
In so doing, the tax authorities set ‘rules whose determination has been entrusted by the Constitution only to the law ’, to use the formula that the Constitutional Council regularly recalls⁴. While it is likely that the litigation relating to this position of the tax authorities will suffer the fate generally reserved by the Conseil d’Etat for instructions which ‘don’t merely interpret, but include(s) provisions that it was only for the legislature to provide’⁵, this questionable position is a source of legal uncertainty. The principle according to which administrative doctrine cannot provide a legal basis for taxation⁶ is once again undermined.
However, the administration’s position might be understandable if it complied with an intention clearly expressed by the legislator but not transcribed in the text finally adopted. This is not the case: the parliamentary proceedings contain no trace of the slightest discussion on the desirability of restricting the scope of the VAT margin scheme to situations that are acceptable to the authorities. Indeed, neither the opinion submitted by Olivier Carré to the President of the National Assembly on 17 November 2009, nor the report submitted on behalf of the Finance Committee on 9 February 2010⁷ mention the very possibility of such restrictions, which would not have been included in the text finally adopted.
The unease is such that this same MP has alerted the Ministry of the Budget, via a question to the Government, to the fact that the administration’s departments ‘erequire, in order to allow resale prices to be taxed at VAT margin under article 268 of the CGI, conditions not provided for in this text’⁸. No response to date.
What attitude to adopt in practice?
Given that there are already many disputes on this issue, the tax judge will soon have the opportunity to rule on the legality of the administrative doctrine that serves as the legal basis for the adjustments in question. In the meantime, there are two options available to professionals selling building land resulting from the division of property complexes that included built-up assets.
The first option is a contentious one: insofar as the administrative doctrine in question adds to the law, taxpayers could regard it as unenforceable and continue to apply the VAT margin scheme as provided for by law. This will almost certainly be challenged by the tax authorities. However, its success seems highly uncertain.
The second option is pusillanimous: in order to secure the benefit of the VAT margin scheme on resale, professionals could try, as the administration invites them to do, to have a division of land made before buying. While attractive on paper, this solution seems unrealistic in practice. There are two major obstacles to its implementation.
This ‘invitation’ to the tax authorities borders on an aporia in the classic case where the sellers of the property are private individuals, unfamiliar with notarial and property practices, who are often reluctant to divide the land themselves prior to the sale. The fact that the buyer offers to cover the cost of this formality should make it possible to resolve certain situations, but it is possible that this constraint will weigh on the property dealer’s proposal if he is in competition with other potential buyers who do not have the same objectives.
Worse still, the division of plots prior to the purchase by the professional may be a trap for private sellers. They may be unpleasantly surprised to find that the tax treatment of their capital gains on the sale is affected by this operation. If the pleasure grounds sold with the built property constitute ‘the immediate and necessary outbuildings’ of their principal residence within the meaning of article 150 U II 3° of the French General Tax Code, individuals may be exempt from capital gains tax on the entire sale price. Admittedly, the tax authorities have been able to restrict the scope of this exemption by considering that by their very nature building land cannot constitute ‘immediate and necessary’ outbuildings ⁹. However, the case law is more liberal than the administration¹⁰ and it appears that the fact that the individual seller himself carries out this division of land to show separately the built building and the building plot or plots is likely to call into question the exemption from capital gains tax on the part of the price allocated to the building plots which he could have benefited from…
Thus clarified, the administration’s position can lead to a zero-sum game: depriving the individual seller of a capital gains exemption or depriving the professional buyer of the VAT margin scheme on resale. There will always be a loser…
1 – Garçon , Jean-Paul, la TVA appliquée à l’immobilier, n°459, Défrenois, Lextenso Editions, 2013.
2 – BOI-TVA-IMM-10-20-10-20140915 no. 20.
3 – BOI-TVA-IMM-10-10-40-20130107 n°10.
4 – See for example: Decision no. 2015-727 DC of 21 January 2016, Decision no. 2013-685 DC of 29 December 2013, Decision no. 2013-336 QPC. – Senate, 9 February 2010, Rapp. No. 278 (2009-2010) by Philippe Marini.
5 – CE 20 December 2013 n° 371157, 372625 and 372675, 8th and 3rd s.-s., SA Axa France Vie : RJF 3/14 n° 284
6 – CE 11 July 1979, req. n° 02 087, Rec. Lebon p. 316 and 317, DF 1980, n° 1, comm. 4, concl. P. Lobry, RJF 10/79, n° 587.
7 – Report No. 278 (2009-2010) by Philippe Marini.
8 – Question No 91143, JOAN of 17 November 2015.
9 – BOI-RFPI-PVI-10-40-10-20150812 n°340: ‘when a plot of land, which constitutes an outbuilding of the main residence, is sold as building land, the exemption provided for in 3° of II of Article 150 U of the CGI cannot apply, with the exception of outbuildings that constitute premises and parking areas used by the owner as annexes to his home (garage, car park, shed, caretaker’s cottage) as well as courtyards, passageways, and, in general, all land used as access roads to the home and its annexes. The exclusion of such transfers is due to the nature of the land concerned, i.e. building land, which cannot, in any event, be considered as immediate and necessary outbuildings.
10 – See in this regard, for a full study of the issue: Emmanuel Cruvelier, Plus-Values immobilières et cession des dépendances d’une résidence principale, La revue fiscale du patrimoine n°1, December 2014, study 2.
Bertrand Lacombe
Lawyer at the Court, Lacombe Avocats