Assistance With VAT on Land and Property Transactions

The team of specialists at The VAT People has a great deal of experience in advising businesses on the intricacies of VAT on land and property transactions.

We have helped many companies structure these often very high-value commercial property transactions correctly from a VAT perspective in order to make any eligible savings. Due to this experience, we are well-placed to guide your business through this area.

The complicated nature of VAT on land and property transactions means that calculating what you owe can be extremely difficult - but we are here to help.

Contact The VAT People today by calling 0161 477 6600, or fill out an online contact form and we will get back to you at a more convenient time.

The intricacy of VAT regulations means that even a minor oversight can lead to financial consequences. Failure to comply with these regulations could result in fines from HMRC, damaging both your business's finances and reputation. Moreover, without an understanding of the available VAT reliefs and exemptions, your business may incur higher costs, effectively paying more VAT than necessary on your property transactions.

The VAT People’s extensive knowledge of VAT in land and property transactions allows us to identify opportunities where you might be overpaying and to guide you in taking advantage of any relevant reliefs. Whether you're dealing with taxable supplies, exempt supplies, or other aspects of VAT law, we provide tailored advice to ensure that your VAT liabilities are minimised and that your business remains fully compliant with HMRC requirements. Additionally, we can assist you in understanding when and how to notify HMRC of changes in your VAT circumstances, keeping your business on the right side of compliance.

By partnering with us, you can focus on your core operations, knowing that your VAT obligations are being managed by experts who are committed to protecting your financial interests.

Liability of supplies in land and property transactions

Land or property transactions can be subject to VAT at different rates, including being exempt from VAT, which in turn can have an impact on a businesses ability to recover input tax incurred in the course of making these supplies. The classification of each transaction has significant implications for your VAT obligations and opportunities, particularly concerning the recovery of input tax on related expenditures.

For example, taxable supplies in property transactions are subject to VAT at the zero, reduced or standard rate, depending on the specific nature of the transaction. These supplies may require businesses to charge VAT and remit it to HMRC. A key advantage of dealing with taxable supplies is the ability to recover input tax on associated costs, which helps to reduce the overall VAT burden on your business.

Conversely, transactions classified as exempt supplies, such as the sale of existing residential properties, leases or lettings of residential properties, and the sale of bare or undeveloped land (that is not opted to tax), are not subject to VAT. This exemption also extends to the granting of licences to occupy land, such as grazing rights or temporary use permits, as well as the granting of certain rights over land, like easements or rights of way.

Additionally, when a business including land and/or property is sold as a transfer of a going concern, the transaction may also be classified as outside the scope of VAT, provided specific conditions are met.

Zero-rated transactions are still considered taxable supplies for these purposes but are subject to a 0% VAT rate. While no output tax is due, businesses involved in zero-rated transactions can typically recover input tax on related expenditures. This distinction is particularly advantageous in sectors like property development, where high-value transactions are common, and the ability to recover input tax can result in substantial financial savings. The zero-rate of VAT applies (broadly) to the construction of:

• New build dwellings
• A relevant residential property
• A new building to be used by a charity ‘wholly’ for non-business purposes
• Installation of energy saving materials
• Certain adaptations for the disabled.

The reduced rate of VAT (5%) applies to conversion of properties, i.e., from commercial to residential or where there is a change in the number of dwellings, and the renovation of residential properties that have been empty for 2 years or more.

Certain materials provided alongside zero-rated construction services, or reduced-rated conversion services may also qualify for the zero/reduced rate, subject to certain criteria.

Construction services are unlikely to be exempt from VAT – this relates more to the actual supply of property, including;

• All leases, assignments, surrenders, reverse surrenders or licences to occupy any interest in land or buildings;
• Sales of freehold commercial property or civil engineering works more than three years old or sales, leases or licences of all residential or charitable property.

The standard-rate of VAT will apply to anything that is not specifically defined as zero-rated, reduced rated or exempt from VAT.

It's necessary to correctly classify each transaction to avoid misclassifying a taxable supply as an exempt supply or vice versa. Such errors could lead to either overpaying VAT or facing penalties for non-compliance.

Input VAT Recovery

Input VAT incurred in the course of a construction/conversion project, or on the purchase or certain properties, is likely to be significant and whether this can be recovered is determined by the onward supply made in relation to the property. Consideration should be given to the intended supply to be made on completion of a construction/conversion project, or purchase of a property, so that this can be factored in and the business is able to explore options and make an informed decision.

Option to Tax

The option to tax provisions allow for a person to tax certain exempt supplies of land, specifically those relating to commercial property (residential properties cannot be opted to tax). The main purpose of doing so would be to facilitate the recovery of input tax incurred in relation to these supplies, which would otherwise remain irrecoverable. There are two stages to opting to tax land/buildings; the opters decision to elect the land/buildings for VAT and, subsequently, formally notifying HMRC of this decision.

Once this is confirmed, the opter would be required to account for output VAT on supplies of the relevant commercial property (e.g. it’s lease/sale). This would establish a link to an onward taxable supply and would allow for the recovery of input tax incurred in relation to the property, including that relating to its refurbishment/upkeep.

Capital Goods Scheme

The Capital Goods Scheme applies to capital expenditure relating to land and buildings with a net value of more than £250,000, such as the purchase of properties themselves and high value capital works (refurbishments, etc).

Where VAT is incurred on such expenditure initial recovery of the VAT follows the normal rules as detailed above, however, 10 annual adjustments will have to be made at the end of each financial year to reflect the actual use of the premises, i.e. where the property is used to make exempt supplies, a proportion of the VAT recovered will have to be paid back. For each adjustment, 10% of the total VAT recovered on the construction will be at stake.

These apportionment calculations will have to be repeated for each financial year using figures collated throughout the year, detailing the amount of non-business use, taxable and exempt supplies made in relation to the property, and then the apportionment percentage calculated will reflect actual use.

Should the use of the building be fully taxable then no adjustment will be required. However, if exempt supplies are made or the property is used for non-business purposes, VAT recovered initially will need to be adjusted and repaid in accordance with the adjustment calculations.

Construction industry scheme (CIS) reverse charge

Under the CIS VAT reverse charge, when invoicing contractors for qualifying goods/services, VAT registered subcontractors will not add VAT to this invoice. Instead, contractors will be required to account for the suppliers output tax on their VAT return, also deducting the same amount as input VAT.

However, there are a range of supplies excluded from this domestic reverse charge and in these instances, VAT will be accounted for in the normal way;

• Supplies to “end users” (i.e., customers that do not sell the services onwards)
• Supplies to “intermediary suppliers” – i.e., businesses connected to an “end user” such as one that has a relevant interest in the land or is part of the same corporate group as the business that owns/leases the land.
• Specific services such as professional services (e.g., architects fees)/installation of security systems.

DIY Housebuilders Scheme

This scheme aims to put DIY builders/converters into broadly the same position to a developer selling zero-rated premises, however his does not only apply to those who undertake the construction works themselves - an individual commissioning the works is sufficient for this to apply.

Under this scheme, HMRC refund input VAT incurred on goods used in qualifying zero-rated construction work/reduced rated conversion work. This applies to goods that would be zero/reduced-rated when supplied alongside zero/reduced-rated services, however VAT cannot be recovered on goods/services which are liable to the standard rate of VAT, i.e., professional fees and the hire of goods in isolation. To utilise this scheme to claim back VAT on building materials the following criteria must be satisfied;

• The goods must be using in connection with work which comprises the construction/conversion of a building designed as a dwelling;
• The use of the building must be for a relevant residential purpose;
• The individual must be acting in a non-business capacity and constructing a dwelling to be used either by them or their relatives as a principal place of residence;
• The claim must be made within the relevant time constraints and in the appropriate manner – namely within 3 months of the date of completion of the property using the form VAT431NB. The claim can only be made once and must occur after completion (but within 3 months of this date). HMRC’s current stance is that for these purposes the date of completion is that shown on the completion certificate completed by the local planning authority. All relevant invoices should be retained and submitted alongside this form. If required, this firm can assist in the collation and submission of the relevant documentation. I have included a link to a useful webpage that lists items that can or cannot be claimed when submitting a DIY VAT claim:

https://www.gov.uk/guidance/goods-and-services-you-can-claim-for-under-the-vat-diy-scheme