21 Jun 2016
Q. My client is a property developer and is purchasing a barn that has been partly converted into a dwelling by another developer who has unfortunately run out of funds. The current owner is going to sell the barn to my client without VAT on the basis that the sale is the first grant of a major interest in a dwelling and thus zero-rated. However, does this mean that once my client has completed the conversion his sale will be exempt from VAT because it is not the first grant of a major interest and therefore that any input tax he incurs will be irrecoverable? A. VAT Act 1994 Schedule 8 Group 5 Item 1(a) zero-rates the first grant by a person constructing a building designed as a dwelling. This would seem to mean at first glance that only the first developer can zero-rate the grant of a major interest. However, HMRC's guidance manual VCONST03500 states that there are circumstances where more than one person, in succession, can have 'person constructing’ status and zero-rate the respective grants of a major interest. Therefore, if a developer who partly constructs a dwelling past foundation stage then sells it to a second developer who completes it and sells it then the grant of the major interest in both cases will qualify for zero-rating. In addition to 'person constructing', the above also applies to 'person converting' a building from non-residential into houses, flats or a relevant residential building. HMRC guidance indicates that in any case where planning permission has been given for an acceptable conversion and work in accordance with that permission has commenced, more than one person throughout the conversion may have 'person converting' status and grant a zero-rated major interest in the property. Therefore, in your client’s case the sale of the grant of a major interest by a person converting a non -residential building into a building designed as a dwelling will be zero-rated under VAT Act 1994 Schedule 8 Group 5 Item 1(b) and input tax will be recoverable in full. Do you have clients involved in developing residential property? Are you confident that you know the rules on when the sale of a residential property is zero-rated and when it is exempt? Getting it wrong could result in your client under or over-claiming VAT and, with HMRC’s heavy handed approach to the imposition of penalties, mistakes could prove costly. If you would like to discuss any property transaction, please contact the VAT Advice Line on 0844 561 8121 to discuss the implications. Our team of experts can also provide a written consultancy service at £180 per hour plus VAT. Alternatively, learn more about our VAT consultancy.
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