VAT and land development
Daniel May, VAT Manager looks at VAT issues that developers need to consider.
I n the post-pandemic economy, we are increasingly seeing many property developers who are seeking to dispose of land they had previously banked for future development. This appears to be caused by concerns over rising interest and material costs, coupled with a recent fall in housing prices. Buying land for development may seem like a relatively straightforward transaction, but there could be a hidden VAT snares which can trap the unwary developer. However, with some careful planning and good advice, this can usually be avoided.
When is VAT payable? The purchase of land, is by default, exempt from VAT. However, the current landowner may have chosen to exercise an option to tax over the land in the past, meaning that VAT must be charged at the 20% standard rate to the developer when the sale is made. Where VAT is incurred, a property developer constructing new dwellings for onward sale is entitled to reclaim the VAT paid against the intended future zero- rated income from the dwellings. This is usually legitimately reclaimed before construction even begins, to aid cashflow. However - an issue may arise if, within six years of forming the original intention, and before first use, the developer changes their intention to sell the dwellings and instead decides to sell the land as a VAT-exempt transaction without having made an option to tax. This change of use and intention triggers a ‘clawback’ of the VAT meaning the developer must repay the VAT originally claimed upon purchase of the land. In addition, input tax on related disposal costs, and even input tax incurred in the past which is no longer within the de minimis limits, may no longer be reclaimable.
Finding a solution There is usually a solution, but it requires some careful consideration and advance planning with your tax adviser. If the developer is able to make their own option to tax, they can convert the exempt supply to a taxable one. The option to tax is a relatively straightforward process but – inevitably - does not come without its own economic and tax-related risks.
For example:
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If the buyer (the developer) is intending to make exempt supplies themselves, for example building dwellings to rent out), the increase in the sunken VAT cost could price them out of market for the land Certain types of sales are not impacted by an option to tax such as sales of land to a housing association, or to an individual that intends to build their own dwelling. In such cases, the option to tax is disapplied and we are back to square one
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1 0 | SCRUTTON BLAND | P R O P E R T Y A N D CONSTRUCTION
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