A guide to VAT for residential property developers
Converting a property can be an incredibly long-winded and difficult task, which can take months or even years to complete. And while the physical labour involved in developing property is usually considered, the costing and tax issues associated with this process can be overlooked, despite the fact that they are of equal importance.
In this guide, we will examine the main VAT considerations that are applicable to residential developers, while setting out the basic VAT position on supplies made to and by them.
VAT on new residential buildings
When a residential building has been constructed, its first grant of a major interest in it is zero-rated for VAT. This rule also covers a partly-constructed residential building, provided it is clearly under construction. Zero-rating also applies on the first grant of a major interest where the developer has converted a non-residential building into a home.
In cases where the supply consists of the grant of a lease for more than 21 years, only the premium, or first rental payment will be zero-rated. Subsequent payments are exempt from VAT altogether.
One consequence of zero-rating is that developers who make only these types of taxable supplies charge VAT on them at 0%, however, they are entitled to full recovery of VAT paid on costs that they incur. Importantly to zero-rating the first grants described above, the supply must be made by a person constructing or converting the building. In the majority of cases, developers will have this status, but it can be used by more than one individual.
VAT on construction and conversion
Services supplied during the construction of a residential building are zero-rated. However, the separate supply of services in the course of construction of a residential building - for example, by an architect or surveyor - are specifically excluded and are standard-rated.
It is worth noting, however, that if such services are obtained as part of a ‘design and build’ lump sum contract, the liability of the supplies on the design element follows the liability on the build portion. Therefore, it may be possible to zero-rate this aspect too.
Building materials that are supplied with this type of construction service, and then incorporated into the building, will also be zero-rated, however, materials supplied on their own will be applicable with the standard rate.
Some residential conversions can qualify for VAT at a reduced rating of five per cent, including the supply of ‘qualifying services’ in the course of residential conversions. What’s more, building materials supplied with those services are also reduced rated, although again, materials supplied on their own will be standard rated.
Residential conversions that can benefit from this reduced rating include:
When the developer is converting commercial property to residential property
Where there is a change in the number of dwellings, for example, a block of flats being converted into one single residence
In cases where the developer has refurbished and redecorated the building, but kept the same number of homes, the services will be standard-rated.
Holding a valid certificate
A valid certificate must be held by the developer when making any zero-rated or reduced-rated supply in connection with a building that is intended for a residential purpose. The certificate is issued by HMRC before the supply is made, and the developer should take all steps to ensure it is valid.
Two types of certificate are available - one which confirms the developer’s eligibility to receive zero-rated or reduced-rated building work, while the second confirms their eligibility to receive a zero-rated or reduced-rated sale, or long lease.
Disapplication of the option to tax
When the supply is not zero-rated, a developer may decide to exercise an option to tax over property, so that the onward supply will become a taxable standard-rated supply, rather than an exempt supply. This disapplication can give rise to similar problems regarding originally recovered input tax, where this levy was recovered on the basis that the developer would be making a taxable supply. Often, this leads to a clawback adjustment for the developer, and may need to be factored in when it comes to pricing up a development.
The option to tax is disapplied where the building is designed or adapted, and is intended for use as a dwelling, or for a relevant residential purpose. In cases where a relevant residential purpose is intended, the option to tax will only be disapplied when the buyer has informed the developer of his or her intention to use the property for such a purpose, they will also need to provide a certificate stating that is the case.
It is possible for the buyer and developer to agree that the buyer will not issue such a certificate, so the developer will be entitled to apply the option to tax. This is of great importance where the property is part of the Capital Goods Scheme, and an adjustment would be needed if the supply was to be exempt.
Other cases where the option to tax is disapplied include cases where the buyer acquires a commercial property and states that the building is intended for use as a home, or solely for a relevant residential purpose, provided that the buyer issues a certificate to this effect. In such instances, the developer has the discretion to accept this certificate after the price has been fixed where the supplies are made after the certificate has been issued. There is little advice on what is meant by ‘legally fixed’, but it can include factors such as exchange of contracts, letters or the signing of heads of agreement.
On top of this, the option to tax can be disapplied when the land is supplied to a relevant housing association, provided this body gives a certificate to the developer before the price has been fixed. Here too, the developer has the discretion to accept the certificate after the price has been fixed where the supplies are made after the certificate has been issued.
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