Robert Facer addresses the complexities of VAT legislation when it comes to construction and advises developers and landowners to act early to ensure their housing projects enjoy zero-rated 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 subject to the zero rate of VAT; 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.
Nearly new may not be enough
In these situations, the retention of existing features or façades 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, the retention of a façade (or a double façade on a corner site) must be a condition or requirement of statutory planning consent or similar permission. 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 facades should be treated with caution. Although it may be possible for planning applications to be amended, and fresh permissions granted, this may prove to be a difficult, lengthy and costly process that affects the ease of completion.
Construction works for developments which involve the retention of existing features, other than a façade, are unlikely to qualify for the zero rate of VAT, based on HMRC’s current policy. However, this is a developing area of case law and recent cases have indicated that HMRC’s policy in this area is too restrictive.
Similarly, 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. In reality however, it can be difficult to attain clear confirmation, and the process is often drawn out. In order to increase the potential success of this tactic, a clearance should be sought early and the developer must be able to show that it has a genuine interest in a real transaction.
Selling or renting?
Another vital factor to consider, when assessing the VAT liability of a development, is the manner of its planned use. To be entitled to reclaim VAT incurred on development costs, the new dwelling(s) must either be sold, or a lease granted of more than 21 years. 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 may lose the right to reclaim VAT on development costs and must repay any input VAT previously claimed back from suppliers or contractors during construction. Pursuit of such a strategy should be decided on only if the developer’s working capital and profit margins are robust enough to meet these costs.
The ongoing complexity 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.
Counting the cost of complexity
VAT 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 approved alterations to protected buildings were historically zero-rated, this exemption was scrapped in 2012. There is a reduced rate of 5% VAT which applies to a wide range of residential conversions, renovations and alterations. However, while much lower than the headline rate of 20%, 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.
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, ie opting to rent the property rather than sell, will have on their VAT liability.
Robert Facer is director of VAT at accountancy firm Menzies
