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At what point can you opt to tax?

Exchanged on property

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Commerical property has been sold to my client with no VAT being charged, they are a developer. At present they have paid a deposit and exchanged contracts but will not complete until my client obtains planning permission. They may then sell the property with the benefit of the planning (which basically includes demolishing the building and building new houses) or they will undertake the work themselves to then sell on the houses (thus creating zero rated supply)

They are starting to incur a fair amount of professoinal fees (architects etc.) so would like to reclaim the VAT, my question is at what point can they opt to tax the property, now or do they wait until completion? As they are unsure of their intention with the property (sell with planning or develop properties themselves) I assume to be sure they would need to opt to tax property, even if they end demolishing them, to enable a VAT reclaim on the opted property if they just sell with planning?

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avatar
18th Sep 2018 09:36

I assume they're likely to sell to another developer (other than a reg'd Housing Association) rather than any self builders, as the option may disapply when selling to someone building their own home (or the reg'd assoc)?

If that's the case then you can opt any property at any point, so I could opt Buckingham Palace if I wanted, of course wouldn't do me any good as I don't have a beneficial interest (at the moment: come the revolution?). Of course as I don't have an interest and am unlikely to acquire one HMRC may send me away with a flea in my ear, but if there's a likelihood of the client gaining an interest in this land e.g. as exchange has happened, then HMRC shouldn't have a problem in this case.

So if they're certain making an option won't disadvantage them; if they're only going to sell to VAT reg'd business who can recover the VAT, or develop Z/R dwellings themselves, then they can opt as soon as it looks likely they'll acquire the land.

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By DJKL
18th Sep 2018 10:20

They really ought to do the sums comparing:

1. the input vat they might save by opting re the professional fees

with

2. the extra SDLT any purchaser might then need to pay if they sell it on to them undeveloped

They also need to consider if the SDLT cost saving will likely influence the price someone might pay for the undeveloped site.

Given no crystal ball the catch is not opting is sub optimal if they do build the finished dwellings so maybe, if worthwhile, they should see if setting up an entity to offer design and build to the owner of the site might work re hedging their bets a bit.

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to DJKL
18th Sep 2018 10:28

Why would there (necessarily) be any VAT if it is sold on mid development?

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By DJKL
to Portia Nina Levin
18th Sep 2018 11:14

Portia

Surely it depends what they sell and to whom, or am I missing something?

They could sell house plots to individuals for own homes (being exempt -which will of course impact vat claimed), but if they are selling to another builder/developer to complete the project SR vat will possibly apply (depending on stage of build achieved) and accordingly SDLT on the vat may be an issue.

If site say sells with planning for £8 million and planning etc fees are say £200,000, the vat on them recovered only £40,000, then adding £ 1,600,000 vat to the SP and purchaser triggers extra SDLT of £80,000 on same may result in a lower selling profit.

Not that we will likely do many more development but if there is a way of having your cake and eating it not involving using own construction company offering design and build I would be very interested (Albeit we do not have SDLT up here, but LBTT is similar)

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to DJKL
18th Sep 2018 11:23

If they are transferring a development that has commenced to another developer, surely it's a TOGC?

So you get the planning, start demolishing and then sell.

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By DJKL
to Portia Nina Levin
18th Sep 2018 11:36

The development risk with that is if you half demolish and prospective buyer walks from deal or stiffs you on the price you may be left with something that now cannot be let as commercial property (no earning potential whilst held and costs running) and possibly you have insufficient funds/skillset yourself to push through the development to dwellings.

No doubt it is possible but I would want decent solicitors acting for me before the wrecking ball started swinging, is it still a TOGC if deal struck before demolition; like comedy I guess timing is everything?

Slightly different but I know someone (friend not a client) who was selling his house to a builder who wanted him to demolish it before sale to reduce LBTT but the catch was to bite re lower rate LBTT it needed demolished before missives concluded and if he demolished with no sale contract then no guarantee his buyer would not "renegotiate price" at that juncture with a gun at his head.

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By Ruddles
to Portia Nina Levin
18th Sep 2018 11:46

An interesting point. Is demolition part of the development, or merely preparatory works in anticipation of development?

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By DJKL
to Ruddles
18th Sep 2018 12:02

Well certainly with planning law demolition itself is not enough, if you want to lock a planning permission into its permitted commencement time period then these days you need to submit a commencement notice and usually dig a hole somewhere.

(At least commencement notices now stop you inadvertently changing the planning status of a structure, something we managed to do where by acting a bit too fast we (in planning terms) changed a pub into offices and then had to reapply for it to be a pub again.

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to Ruddles
18th Sep 2018 12:03

Well, it depends on intention surely? Which may change.

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By Ruddles
to Portia Nina Levin
18th Sep 2018 13:11

I really don't know - I was just throwing that out there for discussion. There is a body of case law on the subject, but all cases where TOGC treatment was agreed involved cases where development, eg installation of infrastructure, building works etc had actually commenced. On the other hand, TOGC status did not apply in cases involving preparatory works only. Depending on what your definition of 'development' is, I'd say that demolition is preparatory.

Where building works have commenced, there is a reasonable presumption that the purchaser will continue the 'development'. Where demolition works have commenced, there is a reasonable presumption that the purchaser will continue to demolish the property. But is the presumption that he will then go on to develop the property a step too far? I don't know.

Or is the demolition itself a business activity capable of being a TOGC? I doubt it, but I don't know.

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18th Sep 2018 10:27

What spidersong said. You can opt whenever you like. Even when you don't have an interest in the property. The option ceases to be effective though once you have not had an interest in the property for three years, I believe. CBA to check though.

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By Ruddles
to Portia Nina Levin
18th Sep 2018 10:58

Six years.

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to Ruddles
18th Sep 2018 11:11

Yes. Like I said, six years!

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By Ruddles
to Portia Nina Levin
18th Sep 2018 11:15

Sorry, I didn't see the "[two times] three years" in your post

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to Ruddles
18th Sep 2018 11:23

I meant 6 years. Everybody knows I meant 6 years!

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By Ruddles
to Portia Nina Levin
18th Sep 2018 11:33

Everybody but Portia it seems, as she has yet to correct her post :)

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avatar
By Jigs
18th Sep 2018 13:38

Thank you all, if they sold with just planning, the purchaser would only buy with the intention of converting to residential anyway so the buyer could ask for the option to be disapplied, however I assume this makes the supply exempt thus affecting VAT already reclaimed?

Planning would cost circa £200k but VAT on future sale (with planning only - no work carried out) would possibly be £800k (using £4m as approx. sale price) meaning the buyer would pay extra £40k of stamp (@ 5%) which is the same as the VAT reclaim.

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By Ruddles
to Jigs
18th Sep 2018 14:04

Disapplication of the option would not normally disturb recovery of input tax previously claimed in anticipation of a taxable supply, but would block recovery of input VAT relating to the sale itself. One exception is where the property is within the Capital Goods Scheme, which doesn't appear to be the case here.

EDIT - ignore that dumbed-down advice. The input VAT could well be at risk. I was thinking of cases where the property had already been used for making taxable supplies. In this case, if the purchaser attempts to disapply the option, the seller has the opportunity to renegotiate the price, or walk away from the deal.

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By DJKL
to Jigs
18th Sep 2018 15:37

This may be worth a read.

https://www.taxation.co.uk/Articles/2017/07/04/336640/vat-converting-pro...

The last part re disapplied option and capital goods scheme looks on point.

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