One of the most important factors in any commercial transaction is to establish what in VAT speak is called the “chain of supply”: in other words, who is doing what for whom. You might think this is obvious, but unless you get this right from the start, it can cause some fundamental errors in VAT accounting.

Who’s the contractor and what’s a joint venture?

It can be particularly confusing in property developments. For example, I’ve heard the terms “developer” and “joint venture” used in different situation. The main reason for the confusion is there’s no specific definition for either term.

Developer

The term “developer” sometimes means the property owner; sometimes it refers to the contractor(s) who is carrying out the construction/conversion work. The term is used inconsistently in contracts and other legal agreements, including joint venture agreements. And if you don’t define the roles correctly, dealing with the accounting and VAT side of things can be very confusing.

In some situations, one party – who I’ll call the “contractor” – provides construction services to the property owner – or the developer. In others, the contractor may also have an interest in the property concerned, or own shares in the company which owns the property. And there are other arrangements such as joint ownership of property, finance arrangements and payments by way of profit shares.

Joint ventures

Some of these arrangements are referred to as “joint ventures”, which can include a variety of arrangements. Typical examples include those where two or more parties come together to finance a project, or where one party provides finance while the other provides services.

Sometimes it’s a combination of these types of arrangements, perhaps involving joint ownership of land and buildings, meaning that the same party, whether a company, partnership, etc may is providing services to themselves as part of a property owning arrangement, even when there’s no intention to be partners.

HMRC often treat such “joint ventures” as partnerships for VAT purposes, albeit that there is no formal partnership or partnership treatment for tax purposes. Either way, it should be possible to structure the legal and commercial arrangements in a way which works for VAT, but you need to sort this all out at the beginning of the project to avoid problems.

VAT registration and HMRC guidance

Because each joint venture arrangement is unique, HMRC don’t provide much in the way of guidance about VAT registration. VAT Notice 700, section 6.8 http://tinyurl.com/qaoj4at explains that, in any doubt, the parties involved should contact HMRC for guidance about the VAT registration arrangements. VAT Notice742: Land and property, section 7 http://tinyurl.com/nxpw8r7 discusses the VAT issues of various property ownership arrangements, such as beneficial ownership and joint ownership.

If you’re considering doing any sort of property development involving a joint venture, PLEASE take professional advice about the commercial arrangements and legal structure before you start. Over the years I’ve been asked to sort out many VAT problems encountered by joint ventures and in nearly every case, some thought and sensible planning in advance could have avoided all of the problems and saved the developers a lot of time and money.

If you need more information about this subject and other issues to do with VAT and residential property development, check out my ebook .

Marie
September 2014

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