Act early to secure zero-rated VAT status

For property developers and commercial landowners, navigating the VAT landscape is a complex process that often has a significant impact on profitability. With many battling turbulent market conditions, including a scarcity of skilled employees, shortages in the supply chain, and pressure to meet the Government’s new housing targets, selecting the right site and development strategy is essential. Business leaders must examine the intricacies of planning applications, building usage, and the incorporation of existing features at an early stage if they are to ensure zero-rated VAT status.

HMRC regulations state that the construction of new residential housing is VAT exempt; however, there are a number of caveats that developers should be aware of. For example, in order for a construction to be deemed ‘new’, in most cases, it must be built from scratch, from the ground up. This can present a particular challenge for developers who are building on Brownfield sites in conservation areas, or attempting to demolish buildings with protected/listed status; and in practical terms, this is an area where HMRC’s policy has been challenged.

In these situations, the retaining of existing features or facade may be essential for planning permission to be granted, and the wording of the planning application itself often dictates whether zero-rated VAT status is granted. To gain approval from HMRC, developers must attain confirmation, in writing, that preservation of existing features was insisted upon by the planning department. Too often, this issue is discussed verbally with planning officers or merely included in drawings without explanation, meaning that HMRC is not inclined to class the development as a ‘new’ residential property.

This issue should also be at front of mind when considering the purchase of land with existing planning permission. While examining the wording of the planning application itself is a must, absence of the correct confirmations or reasoning behind the retention of existing features should be treated with caution. Although planning applications can often be amended, and new permissions granted, this may prove to be a difficult, lengthy and costly process that impacts upon the ease of completion.

growth iconSimilarly, for developers interested in buying land without planning permission, efforts can be made to secure HMRC permissions; in effect a written clearance confirming the development’s eligibility for zero-rated VAT status, if this is in doubt. In reality however, it can be difficult to attain clear confirmation, and the process if often drawn out. In order to increase the potential success of this tactic, permissions should be sought early and the developer must be able to show that it has a genuine interest in a real transaction.
Another vital factor to consider when assessing the VAT liability of a development, is the manner of its planned use. To remain zero-rated, the property must either be sold or granted a lease of 21 years or longer. Crucially, while developers may begin a project with this intention, the cooling housing market post-Brexit and stalling property prices may tempt a change in tactic, with developers opting to rent in the short term and then sell a few years down the line when resale value has recovered.

This move could have significant VAT implications and must be carefully evaluated. In changing the use of a residential development in this way, developers are now liable for 20 per cent VAT on resale and must repay any input VAT previously claimed back from suppliers or contractors during construction. Pursuit of such a strategy should only be decided upon if the developer’s working capital and profit margins are robust enough to meet these costs.

The ongoing confusion surrounding VAT liability is likely to increasingly affect developers’ purchasing decisions, and could impede the Government push towards urban regeneration and Brownfield site development, especially in protected areas. In some instances, projects on Greenfield sites may be deemed more attractive, as the residential property can be built from the ground up, meaning that its status as a ‘new’ development cannot be questioned, and zero-rated VAT status more readily secured.

branded icon of notebook from menziesVAT legislation is also an area of contention for those looking to convert existing structures into residential housing or those completing renovations on listed properties. While such projects were historically zero-rated, this exemption was scrapped in 2012 and a reduced rate of five per cent VAT is now payable. Again, while much lower than the headline rate of 20 per cent, this is a considerable sum which could impede the cash flow of smaller developers and reduce the rate at which they can complete and pursue new projects – reversing this decision would aid market players in addressing the UK’s housing crisis.

The securing of zero-rated VAT status is often crucial in ensuring the profitability of new residential developments, and calculating liability early is essential if business leaders are to make intelligent commercial decisions. In order to successfully navigate this issue, developers of Brownfield sites must work to attain planning permission which includes the written confirmation required to support their claim, as well as understanding the effects a change of usage i.e. opting to rent the property rather than sell, will have on their VAT liability.

See our Menzies Property and Construction sector team.

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