VAT considerations for construction projects

01.07.2021
Rob Geary
VAT

If you are involved with the demolition or development of a building then consideration should be given to the VAT position and whether it can be reclaimed. Generally speaking, VAT costs would need to be incurred solely in relation to the making of taxable supplies whether they are currently being made or if there is an intention to make taxable supplies.

Where bare land or building plots are concerned, then any VAT costs incurred in acquiring them would typically only be recoverable if it is in the course of making taxable supplies.  Where commercial property or onward supplies of land are concerned then you should consider whether there is a need to opt to tax the site, i.e. make it a taxable asset.  Without opting to tax the site you would generally not be able to recover the VAT costs on the sale of the bare land/plots. In contrast, the sale of any new residential property  (‘dwellings for VAT purposes’) on the site will be a taxable supply, albeit zero rated.  Importantly, it is not possible to opt to tax a residential dwelling but due to the fact it would be zero rated upon sale it allows for full Vat recovery on costs.  Be aware that letting a residential property is exempt from VAT and as a result could restrict the VAT recovery incurred.  

If you do opt to tax the site and then sell land/plots, you would need to charge VAT at 20% and where stamp duty land tax (SDLT) applies it is calculated on the gross price, meaning an additional cost for buyers in some cases. For developers who can reclaim their VAT costs this may not be too problematic.  However where plots are sold to an individual, possibly a self-builder, then they would not be able to recover this VAT charge on their DIY claim.  They should issue a certificate to revoke the option to tax prior to agreeing a sale price.  This puts the land owner back in the position of making an exempt supply and potentially being restricted from some or all of their VAT costs being recovered. 

Points to consider when you opt to tax a site:

  • The majority, if not all VAT incurred, can be recovered subject to making a taxable supply
  • Sales of land / plots will usually have VAT at 20% charged on top potentially attracting an increase in SDLT
  • Sales of completed/part completed ‘dwellings’ will be zero rated and therefore a taxable supply

What if you choose not to opt a site:

  • Sales of land / plots will be exempt from VAT
  • Sales of completed / part completed ‘dwellings’ would be zero rated and therefore taxable for VAT purposes
  • Sales of new (less than 3 years old) holiday accommodation will be taxable at the standard rate of VAT
  • VAT can only be recovered on taxable supplies, such as the sale of zero rated dwellings as well as a % of general VAT costs where both taxable and exempt supplies are made

The main question here is whether to opt to tax or not? This is of course going to be specific to each scenario but it is an important question that should only be answered once the intention for the land/plots has been established.

One solution could be to divide land and opt to tax on specific plots separately to others.  However, this is something that we strongly recommend you seek advice on as additional costs could be incurred when dividing the land and then you are into the realms of partial exemption.  Getting advice and guidance at that stage could prove crucial in ensuring the maximum VAT recovery is achieved for the project.

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