Why is VAT and property so complicated? I remember from many years ago a conversation with an accountant about VAT and property. We’d been discussing his client’s plans for a property conversion and the VAT issues that would determine how much VAT the client would pay on the conversion costs and whether the client would be able to claim any of the VAT from HMRC. The accountant asked why there’s never a simple answer to a question about VAT and property.
Well of course the answer is that the rules are based on EC legislation which was written by the original members of the European Community. But before we all decide to blame the French for our complex VAT legislation, it’s important to remember that the UK legislation – which is among the longest and most complicated in the EC – was put into place by our own UK governments over the years. They COULD have chosen the make the rules much more simple, but didn’t.
You’d be better off complaining to your local MP than blaming the French!.
It’s all a matter of how you translate into UK law a set of general principles. EC legislation allows “exemption” from VAT for housing and other properties that have an important social function. It’s left to each member state to interpret the extent of the exemption and the properties that fall within these categories. The UK legislation does this by including detailed definitions within the legislation. And of course, each and every government since we joined the EC has added to the legislation, to reflect its own policies and increase tax revenue, adding more rules as they go along.
Definitions and terminology
Part of the battle is understanding the terminology correctly and knowing which definition applies in each situation. For example, there are 3 separate definitions of the word “dwelling” and 2 definitions of “conversion”. Even the little three letter word “use” means different things, depending on the context.
However the thing that seems to confuse people the most is that before you can work out how much VAT developers have to pay on the construction costs and how much VAT they can claim from HMRC, they have to know how the finished property will be used and the type of sale, lease, or other occupancy.
There are two aspects to this. The first is whether any or all of the work qualifies for the zero-rate or the reduced rate. This is based on whether the property is a dwelling or has one of the other important social functions (“qualifying properties”) as defined in the UK legislation; i.e. who will physically occupy the property and for what purpose. The construction and sale of new dwellings and other qualifying properties are normally zero-rated, while in certain cases, the reduced rate applies to conversions that create additional dwellings or other qualifying properties.
The second aspect is whether the developer can recover VAT on his costs. This depends on the type of sale, lease or other occupancy that the developer grants in the property, in other words the legal nature of the occupancy.
Once you’ve got your head around these main principles, you can start to understand how the VAT rules apply to residential property development. There isn’t a simple answer, but at least there is a logic to the way that the rules work.
The three stage process
HMRC’s guidance in VAT Notice 708 “Buildings and construction” explains the rules about VAT on construction work very well, while Notice 706 “Partial Exemption” explains the rules about VAT recovery. But putting the two subjects together is where it gets complicated.
In my new book “VATWoman’s Guide to VAT and residential property development”, I’ve explained the subject in a three stage process starting with how the finished property will be used, to enable developers to work out the net VAT cost of the development from the planning stage.
Marie
March, 2014