Selling your land for housing development - VAT considerations

VAT is one of several taxes that need to be considered when selling development land. It is important that you take early advice, and that all necessary steps are carefully implemented.

Your advisors need to liaise closely, as any change to the structure or timing of the deal needs to be reflected in the VAT implementation. The key considerations are outlined in this article. VAT treatment of land sales The first issue is whether the seller is already obliged to charge VAT or has the flexibility to choose whether VAT could be charged.

The sale of bare land is normally exempt from VAT, unless the vendor has notified HMRC of a valid “Option to Tax” over the land. A key step in any transaction is to identify whether the vendor has ALREADY Opted to Tax the land being sold.

There are other instances where the sale of unopted land could be subject to VAT, for example the freehold sale of land with (non-residential) buildings or civil engineering works, unless they were completed more than 3 years ago.

Why would a vendor wish to charge VAT?

To reclaim VAT on related costs.

If the sale is VAT exempt, the vendor is not, in principle, entitled to reclaim VAT on the costs of marketing, improving, or selling the land, (unless the VAT involved is relatively small - “de minimis”.) If significant sums have been spent obtaining planning permission or a promotion fee is payable the VAT at stake could be substantial.

Opting to tax, so that the land sale is subject to VAT, should allow recovery of input VAT. However as ever it is important that the invoices supporting claims for VAT recovery are correctly addressed and drawn up. Note that certain purchasers cannot be charged VAT, even if there is a valid Option to Tax. For bare land, this is normally limited to: -

• Housing Associations, or DIY builders, for residential development; or

• parties connected with; or who have provided finance to; the vendor, where certain conditions are met.

Finally, if the vendor paid VAT on the purchase of the land, or on a subsequent development on the land, within the last 10 years or so, it may need to consider whether any of that VAT is repayable to HMRC in the event it makes a sale that is exempt from VAT.

Does charging VAT cause any issues for the purchaser or vendor?

If the purchaser is constructing new homes for sale (rather than letting) it will usually be able to recover VAT charged, although being charged VAT will impact on its cashflow. The contract should of course state that VAT is payable in addition to the agreed price.

If the sale is subject to VAT, the purchaser will normally suffer an increased SDLT charge, because SDLT is paid on the VAT-inclusive consideration. A seller being charged VAT may therefore wish to negotiate over the price.

An Option to Tax normally binds the person making it for at least 20 years. If the intended transaction is aborted, the Option to Tax will thus normally be in effect for any future transaction. After 20 years, it may be possible to revoke the Option to Tax.

On a practical point, your advisors may not always keep old files for more than 10 years, so it is important that you retain your own copies of Options to Tax correspondence in a safe and accessible place.

This point also needs to be borne in mind if an overage payment, or a payment for agreeing to lift a restrictive covenant, is received at a later stage in relation to Opted land.

What if a vendor is not registered for VAT, but wants to charge VAT on the sale?

The vendor(s) must register for VAT, and formally notify HMRC of an Option to Tax. Where the land is owned jointly, and/or legal title is held by a trustee, care is necessary to identify the correct “person” who should be registered for VAT and making the Option to Tax.

Clearly, this should reflect any changes made to the legal or beneficial ownership of the land prior to sale, e.g. for Capital Taxes planning. It is important that your various advisors liaise closely.

It is also important that invoices and Letters of Engagement from your advisors are correctly addressed to permit reclaims of VAT on deal fees.

A key point to bear in mind is that a VAT registration covers all activities of that “person”. A “person” could be a partnership, a company, or an individual (among others.) HMRC’s practice is to treat joint owners AS IF
they were a partnership for VAT registration purposes.

How simple is the process?

Care needs to be taken to get the detail right. The timing of the Option is important, and it is also important that the land being Opted is clearly identified.

If the landowner has previously received VAT exempt income from the land, (e.g. rent; or if it has previously granted an option to purchase the land) this must be disclosed on the Notification to HMRC. In some cases, HMRC’s prior permission to Opt to Tax is required. This can cause extreme delay; see next section.

A current issue is that the purchaser will typically want to see a written acknowledgment from HMRC accepting the vendor’s Option to Tax. At the time of writing, HMRC is quoting a turnaround time of 120 WORKING DAYS to provide this. Other correspondence is also suffering extended delays.

This point can usually be managed if your advisors carefully document what has been sent to HMRC and prove that it has been received by HMRC.

Conclusion
There can be large sums involved with land transactions, and it is important that the VAT position is carefully considered, and any required actions are undertaken diligently and timeously. Your advisory team needs to work together and communicate effectively.