VAT - residential development

VAT - residential development

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Individual is looking to build a residential property on his land.  The property will be rented, so on these facts can not recover any vat on the construction costs.

I have heard it mentioned before that the owner could sell the freehold interest on to partnership or a limited company in which he was a partner/shareholder and this would constitute a zero rated supply and therefore no vat needs to be charged on the construction.

Can this be done?

Replies (12)

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Quack
By Constantly Confused
05th Sep 2011 16:45

Not one I've heard of...

... but I can't see the flaw in it, other than 'HMRC would never allow such a simple dodge to exist'.

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Galaxian
By Galaxian
05th Sep 2011 17:05

Why should there be VAT on the construction costs?

Surely the construction services and building materials should be zero-rated as it is a new dwelling??

Are you attempting to claim back VAT on professional fees and other items not covered by zero-rating by making a zero-rated supply?

 

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By blok
05th Sep 2011 20:53

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Galaxian,

The contractor must charge vat on the construction costs because he wont have a certificate to show that the A) costs are in the course of an onward supply of a first interest in the sale of a new house or B) it is not in the process of creating a home for the developer.

 

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Galaxian
By Galaxian
06th Sep 2011 05:49

Sorry you've lost me

The construction services should be within item 2(a) Group 5 Sch 8 VATA 1994.

A dwelling doesn't need certifying if it falls within note 2:

 

(2)  A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied–

(a)the dwelling consists of self-contained living accommodation;

(b)there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

(c)the separate use, or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision; and

(d)statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

 

 

 

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By blok
06th Sep 2011 09:03

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Galaxian,

I had stated that the developer had planned to make exempt supplies of rent of the newly constructed house.  Are you still saying that in this case the contractor can zero rate his work?

 

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By spidersong
06th Sep 2011 11:13

Zero Rating

I'm sure Galaxian will say it in a moment, but I'll say it as well.

The construction of new dwellings is zero rated irrespective of what the person paying for it will do with it.

You need 'certification' for relevant charitable use, but a new dwelling is just a new dwelling.

A design and build contract will see the whole lot zero rated (although I think there are rumblings on this at the moment), but if buying in separate professional services then irrecoverable VAT will be incurred. Also if the client does the work themselves, or buys materials themselves, then irrecovarable VAT will be incurred, unless a structure like the one proposed is adopted.

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By spidersong
06th Sep 2011 11:15

Just one thing (as Columbo would say)

Just one thing to check;

When you say 'on his land' I'm assuming that the new dwelling is separately disposable, and occupiable, to any exisiting dwelling on the land. If it's not then things will change.

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By blok
06th Sep 2011 12:22

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sorry let me start again.

The land owner is going to self build the house and incurr costs himself (timber, bricks, roof etc). 

I understand that if this was a contractor providing a turn key solution, the contractor could zero rate the work (apolgies for the confusion)  but the issue here is that we have no recovery position for the freeholder on his costs without an onward zero rated supply by them to a partnership/company.

I hadn't picked up on the point that I was describing a problem that didn't exist as I had badly explained it, but the problem is there if the above is considered.

 

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Galaxian
By Galaxian
07th Sep 2011 06:55

Business brief

Have a read of this re zero-rated sale to a connected which will make the exempt supply of rents. HMRC do not consider abusive, but this is in the context of temporary letting.

http://www.hmrc.gov.uk/briefs/vat/brief10109.htm

A zero-rated sale would enable all VAT incurred to be recoverable, but if the property is going to be let long term, I suspect HMRC would object. The individual would need to be VAT registered and the information put on the VAT1 may be revealing.

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By blok
07th Sep 2011 09:11

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Thanks guys, got there in the end.

Just interested to know what legal recourse HMRC would have to counter this. It appears that there is nothing in the legislation against the proposal (which I agree is contrived) so on what basis can they mount a challenge.

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Galaxian
By Galaxian
07th Sep 2011 19:56

Inserted step

 

Furniss v Dawson decided that, given two findings of fact, any step inserted in a series of transactions which has no purpose other than tax avoidance or the obtaining of a tax advantage is disregarded for fiscal purposes. The two crucial findings of fact are that:

(1)there should be a pre-ordained series of transactions which equate to a single composite transaction; and

(2)one or more of the steps have been inserted with no purpose other than tax avoidance or the gaining of a tax advantage.

 

This was a direct tax case, but HMRC may argue that the doctrine applies for VAT, although they must demonstrate that the zero rated sale is a sham (this might be difficult in your particular circumstances).

 

A point to bear in mind is that HMRC allow developers to to make an 'internal' zero-rate a sale to a connected company due to state state of the market and the need to temporarily let the property to make ends meet.

 

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