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VAT on property is a very complex area and one where mistakes can, and are, made. Property conversions; new developments; creation of more dwellings from an existing dwelling; non- residential development all have different VAT treatments and may be subject to the zero-rate, reduced-rate or standard-rate of VAT. Property sales and lettings could be at the zero or standard rate or be exempt from VAT.

Take, for example, an opportunity to develop a bare plot of land for a residential home which you then plan on selling. You have various options:

  • Obtain planning permission, incur architect fees etc. and then sell the plot before any building work is commenced
  • Obtain planning permission etc. and commence work on building the house yourself before selling on

Each of these scenarios has different VAT implications.

In the first scenario, a plot of land is being sold. The sale of the plot is an exempt supply of land. This means that input VAT cannot be recovered on the architect’s and other professional fees incurred in getting the property ready for sale.

In the latter scenario, the building work has commenced. This means that a residential property is being sold (even if the building work is not completed).

Sales of new residential buildings or new residential buildings in the process of being constructed are usually zero-rated supplies for VAT purposes (although this is subject to various conditions being met). As the sale is a taxable supply the input VAT on the architect’s fees etc. can be reclaimed.

This example shows just one type of property development. We commonly see clients converting agricultural barns to residential use, which can be subject to a 5% VAT rate, which can be very beneficial but where their builders are not necessarily aware of this reduced rate option. More and more clients are also selling plots for large scale development and therefore Opting to Tax the land (thereby bringing the land into the VAT regime), may be beneficial if there are promoter’s fees (subject to VAT) to pay. Opting to Tax allows that input VAT to be recovered.

Each scenario needs to be carefully considered and it is important to discuss any development plans with your adviser before work is commenced so that the VAT treatment can be correctly ascertained.