A Guide to VAT for Residential Property Developers

Converting a property can be a long-winded and difficult task that can take months or even years to complete. Unlike the physical labour involved in developing property, the cost and tax issues associated with this process can be overlooked, despite the fact that they are of equal importance.

The VAT People are experts in helping developers understand the main VAT considerations that are applicable to them, while setting out the basic VAT position on supplies made to and by them. If you are supplying services during the construction of a building, or want VAT advice at any stage of the residential development process to ensure you remain compliant throughout, call The VAT People today on 0330 8284 230 or fill out our contact form.

VAT on new residential buildings

When a residential building has been constructed, the first grant of a major interest in it (usually a freehold sale or a lease of more than 21 years) is zero-rated for VAT. This rule also covers the sale of a partly-constructed residential building, provided it is clearly under construction at the point of sale. Zero-rating also applies on the first grant of a major interest where the developer has converted a non-residential building into a dwelling.

In cases where the supply consists of the grant of a lease for more than 21 years, only the premium (or first) rental payment will be zero-rated. Subsequent payments are exempt from VAT altogether.

Developers who make only these types of taxable supplies charge VAT on them at 0%. One consequence of this zero rating is that they are entitled to full recovery of VAT paid on costs that they incur. It is important to note for the purposes of zero-rating the first grants as described above that the supply must be made by a person constructing or converting the building. In the majority of cases, developers will have this status, but more than one individual can use it.

VAT on construction and conversion

Services supplied during the construction of a residential building are zero-rated. However, the separate supply of professional services in the course of construction of a residential building - for example, by an architect or surveyor - are specifically excluded and are standard-rated.

It is worth noting that if such services are obtained as part of a ‘design and build’ lump-sum contract, the liability of the supplies on the design element follows the liability on the build portion. Therefore, it may be possible to zero-rate this aspect too.

Building materials that are supplied with this type of construction service and then incorporated into the building will also be zero-rated. However, materials supplied on their own will be liable at the standard rate.

Some residential conversions can qualify for VAT at a reduced rate of five per cent, including the supply of ‘qualifying services’ in the course of residential conversions. What’s more, building materials supplied with those services are also reduced rated; although again, materials supplied on their own will be standard rated.

Residential conversions that can benefit from this reduced rating include:

• When the developer is converting commercial property to residential property
• Where there is a change in the number of dwellings; for example, a single residence being converted into a block of flats

In cases where the developer has refurbished and redecorated the building, but kept the same number of homes, services will be standard-rated (unless the building has been empty during the entire two year period prior to commencement of the works).

Holding a valid certificate zero-rated and reduced-rated building work

A valid certificate must be held by the developer when making any zero-rated or reduced-rated supply in connection with a building that is intended for a relevant residential purpose. The certificate is issued by HMRC before the supply is made, and the developer should take all steps to ensure it is valid.

Two types of certificate are available - one that confirms the developer’s eligibility to receive zero-rated or reduced-rated building work, while the second confirms their eligibility to receive a zero-rated or reduced-rated sale, or long lease.

FAQs on VAT on residential property

What is a major interest in a residential building for VAT purposes?

A major interest in a residential building refers to a freehold sale or the grant of a lease for at least 21 years. The first grant of a major interest is usually zero-rated for VAT purposes, provided specific conditions are met. This essentially means that while the transaction is still within the scope of VAT, it is subject to a rate of 0%. The benefit of a zero-rate transaction is that the developer can claim back any input VAT incurred on associated costs.

What does zero-rating mean and when does it apply?

Zero-rating means applying a 0% VAT rate to a taxable supply. In the context of residential property development, zero-rating applies to the first grant of a major interest in a new residential building. This rule also covers buildings under construction or conversions of non-residential buildings into homes. This allows developers to reclaim any VAT they've paid on the costs related to these transactions.

What constitutes construction and conversion services?

Construction services include activities directly linked to the creation of a new residential building or the conversion of an existing building into a residential unit. Zero-rating typically applies to these services, although certain services (such as an architect's or surveyor's fees) are standard-rated unless included in a 'design and build' lump sum contract.

When does a reduced VAT rate of 5% apply?

A reduced VAT rate of 5% may apply to certain qualifying services involved in converting a property, such as converting a commercial building into a residential unit. This rate also applies to building materials supplied alongside those services. The reduced rate can be especially advantageous for developers as it lowers the cost of supplies, thus providing a cost advantage.

What is a valid certificate and why is it important?

Before making any zero-rated or reduced-rated supply, developers need a valid certificate issued by HMRC. This certificate confirms the developer's eligibility for the zero-rated or reduced-rated supplies. It is crucial to hold a valid certificate to ensure that you are in compliance with VAT regulations and can legitimately claim back any input VAT.

How does the Capital Goods Scheme impact VAT recovery for developers?

The Capital Goods Scheme is relevant for developers when the value of a property exceeds certain thresholds. The scheme essentially monitors adjustments to input VAT claimed over a specific period, usually 10 years for buildings. If the usage of the building changes in a way that impacts its VAT liability, adjustments may be required, affecting the amount of VAT that can be recovered.

What are the risks involved in not complying with VAT rules?

Failure to comply with VAT rules can result in penalties, interest charges, and even criminal prosecution in severe cases. Furthermore, incorrect VAT treatment can significantly impact the profitability of a project. Therefore, it is essential to consult with experts who can provide tailored advice on navigating the complexities of VAT law for residential property developers.

What are the crucial steps for developers to ensure VAT compliance?

Developers must perform due diligence, consult with VAT experts, and ensure all necessary documentation, including certificates from HMRC, are in place. Regularly reviewing contracts, VAT invoices, and keeping updated records are also key steps in maintaining compliance.