Technical Articles – VAT & Property

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VAT and property is a complex area of legislation. The general VAT rule is that supplies of UK property are exempt; however, there are numerous exceptions to this rule which could mean the supply could be standard-rated, zero-rated or reduced-rated. At all stages of a property’s life, from initial construction to first sale, repair and further resale, the VAT impact needs to be considered. Getting the rate of VAT correct is important as it impacts on your ability to recover VAT suffered on costs and affects cash flow.

In order to determine the appropriate rate of VAT, each situation needs to be considered on its own merits. Key questions that should be considered are:
- Is the property commercial or residential?
- Is the property listed?
- Has the owner “opted to tax” the property?

This article focuses on the key areas of VAT legislation in relation to supplies of and relating to both residential and commercial properties.

Residential Property
Residential buildings are termed as “dwellings” in VAT legislation. To qualify as a “building designed as a dwelling or a number of dwellings”, a building must satisfy the following conditions:
- each dwelling must consist of self-contained living accommodation
- there must be no direct internal access between the dwellings
- planning consent must have been granted for each dwelling
- the planning consent, and any covenants, must not prohibit separate use of the dwelling
(VATA 1998, Sch 8, Grp 5)

Construction
During the course of construction of a dwelling, both the main contractor and sub-contractors can zero-rate certain services and goods. HM Revenue & Customs provide guidance on these items within Notice 708 Buildings and Construction. The services of architects, surveyors and others acting as consultants or in a supervisory capacity are excluded from zero-rating and are standard-rated.

New
The property is deemed to be new on completion of construction and until the first supply. The first sale of a freehold or grant of a long lease (over 21 years) by a person constructing a non-commercial building is zero-rated enabling them to recover input VAT relating to the building without charging VAT on the sale or lease.

Future Disposals
Future disposals of a property will be exempt from VAT.

Repairs/Improvements
Costs relating to subsequent works on a dwelling will be charged subject to the standard rate of VAT.

Commercial Property
There is no definition of a commercial building; basically a building that does not fall within the definition of non-commercial is commercial.

Construction
The standard rate of VAT applies to all supplies of goods and services in the course of construction, or any building work in connection with commercial buildings.

New
Commercial buildings are classified as new until they are 3 years old. During this period, the sale of the freehold is standard-rated as is the sale of an uncompleted building.

Future Disposals
Once the building is over 3 years old, disposals of future supplies, including disposal or rental, are by default exempt from VAT. However, exempt supplies can be turned into standard-rated supplies by an option to tax. If a person has opted to tax a property, the subsequent disposal will be subject to the standard rate of VAT.

Option to Tax
The option only applies to commercial properties. Once an option has been made it can only be revoked within the first 6 months or after years. The option is made on the property by a person; therefore all supplies of that property by the opter are standard-rated.

Repairs/Improvements
The standard rate of VAT applies to all supplies of goods and services in the course of alteration or refurbishment.

If you are unclear which rate to apply, you can write to HM Revenue & Customs for a ruling. A ruling can be requested for a particular transaction that has occurred or will occur in the near future. In order to rely on the ruling, you must present all the facts.

Due to the minefield of legislation in this area, it is common place where there is doubt for the standard rate of VAT to be applied to an invoice. This treatment is incorrect and the only recourse for a customer is to go back to the supplier for a credit note.

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