Managing the VAT cost of land | KPMG | UK

Managing the VAT cost of land

Managing the VAT cost of land

The Government’s view of what the housing sector should be doing is clear: build, build, build

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In that light, a good piece of advice for housing associations looking to commission more stock, is that VAT development companies have now removed most of the irrecoverable VAT on development expenditure. However, this does not typically include any VAT incurred on the land acquisition. 

Obtaining relief for this VAT is a complex process. There are many possible ways of resolving the issue, but unfortunately no one-size-fits-all solution. 

VAT on land

The default position is that the sale of bare land is exempt for VAT purposes. This is a positive development for purchasing housing associations: with no VAT applied to the purchase, there is no need to determine whether any VAT is recoverable. There is also, usually, a lower stamp duty land tax (SDLT) bill, because this is charged on the gross land value – in other words, consideration plus VAT. 

However, when the vendor makes an exempt sale of the land, they are not normally entitled to recover any VAT incurred on costs connected with the sale. This includes any VAT incurred on the purchase of the land and associated professional fees. Vendors of land often therefore choose to tax the land, so that its sale becomes subject to VAT at the standard rate and they are able to recover all VAT on related costs. This situation then, however, becomes less attractive for the purchasing association. 

Possible solutions

Fortunately, there are a number of possible answers, including:

  1. Disapplying the vendor’s options to tax 
    A housing association can choose to disapply the vendor’s option to tax all or part of a site, thereby making the land supply exempt from VAT. However, as the developer selling would then be unable to recover VAT on any land-related costs, they would inevitably want to increase the net price. The trade-off is therefore between the additional cost of purchase if the option is disapplied, (which would need to be approved by the vendor) and the irrecoverable VAT incurred on the purchase price (and possible additional SDLT). On the whole, the former tends to be better value for the purchaser – but the calculation needs to be made during the initial development appraisal, to compare the financial implications both ways.
  2. The vendor partly completes the site 
    If, prior to the land transfer, the vendor partly completes the construction of the homes on the site, they can then treat the sale of land as zero-rated. In this case, the housing association pays no VAT and the developer is entitled to recover the VAT they have incurred  ̶  the best of both worlds from a VAT perspective. However, this option brings other commercial considerations into play, such as planning consents and the question of how to finance the vendor’s construction.
  3. A non-VAT registered member of the housing association’s group acquires the land
    The most common option here involves another member of the housing association’s VAT group acquiring the land and partly completing the homes before selling them to the housing association. Again, while this is a tidy solution from a VAT perspective, it introduces other issues, including the potential for an increased SDLT charge.
  4. Considering the scheme mix
    The developer could also build only those properties with tenures that entitle a housing association to recover the VAT incurred, such as outright sale and shared ownership. Again, commercial considerations still need to be taken into account.
  5. Suitable partial exemption 
    The partial exemption method, used to determine the amount of VAT incurred by the housing association, needs to be able to deliver a fair and reasonable level of VAT recovery on any tax  incurred. If, for example, 50 percent of the homes are for outright sale and shared ownership, then a residual recovery rate of 5-10 percent would not be considered fair and reasonable.

All these and any other solutions need to be balanced against your association’s commercial aims for the land and any other taxes, primarily SDLT. In our experience, it’s important to review these as early as possible in the process, while the development options are still flexible and there’s time to negotiate successfully with the vendor of the land. 

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