When it comes to land and property projects, recovery of VAT can be a complex issue. Although it is possible to reclaim input VAT on land and property transactions in a number of cases, it is sometimes difficult to determine whether or not your project will be eligible.

A case study from 2017 has demonstrated the potential grey areas that exist when calculating how VAT rules will apply to your project, particularly when dealing with building conversions or other potentially complex situations. It also underlines the importance of getting the right VAT advice when embarking on a project like this.

When can input tax be recovered?

As a general rule, the term ‘input tax’ refers to the VAT incurred on any project-related purchases and overheads that a business incurs when making taxable supplies relating to land, property, and construction.

If your business has made supplies of land and property that are liable for VAT, all of the VAT incurred on costs directly associated with the land and buildings can be recovered. This applies to standard-rate, lower-rate, and zero-rated supplies, but does not apply to a number of specifically excluded exempt supplies, including:

• Leases, assignments, surrenders, and licences to occupy interests in land or buildings
• Sales of freehold commercial property or civil engineering works that have not been opted to tax and are more than three years old
• Sales, leases, or licences for residential or charitable properties

If your business has made exempt supplies of land and buildings, any VAT incurred on costs associated with the transaction cannot be recovered. In cases where the supplies included both VAT-liable and VAT-exempt supplies, it will be necessary to carry out a partial exemption calculation, and VAT will only be recoverable on costs associated with the taxable supplies.

To find out more about specific cases where input tax can or cannot be recovered, read the official GOV.UK guidance.

The importance of identifying potential grey areas

A lack of clarity on the recovery of input tax can potentially result in damaging financial consequences for the parties involved. One such case arose in 2017, when developers DM & DD MacPherson made an appeal to the First-Tier Tribunal with regards to input VAT recovery on a building conversion.

The building in question consisted of shop premises, office space and living accommodation across both floors, with no external access to the living accommodation. Planning permission was obtained to turn this property into two semi-detached dwellings, but confusion arose due to the fact that each of these new developments made use of part of the original living accommodation and part of the original commercial property.

The appellant had recovered input VAT relating to the conversion of the property under the presumption that the onward sale of the property would be zero-rated for VAT purposes, as the first grant or major interest in a building designed as a dwelling or number of dwellings. However, because the proposed dwellings were partly created from what was previously living accommodation, the tribunal ruled that the onward supply would be exempt from VAT, meaning input VAT recovery would not be possible. As a result, the appeal was dismissed.

The lesson for businesses

This case highlights the potential complexities involved in recovering input VAT, as many similar cases have been decided in favour of the taxpayer. VAT treatment of projects such as this one is by no means clear, which is why it is essential to seek the right advice when handling this kind of project.

Carefully considering the VAT consequences of any proposed property transaction prior to completion can help to ensure that you do not suffer any unnecessary VAT losses, which can often be substantial given the amount of money involved in these transactions.

To help safeguard your business against any unanticipated VAT loss when it comes to a property transaction, call our free VAT helpline. Our team of VAT experts can be reached on 0161 477 6600 and can provide tailored advice on how best to approach your specific case.