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HMRC internal manual

VAT Construction

Zero-rating the construction of buildings: Capital Goods Scheme (CGS)

When a developer’s first grant of a major interest, in a building that he has constructed, is a long lease he will be making a business use of it as opposed to simply selling it and therefore the building must be treated as a capital item.

The first grant of a major interest (freehold sale or lease exceeding 21 years) in residential property by its developer is zero-rated, under VAT Act 1994, Schedule 8, Group 5. However, all subsequent grants in the property are VAT exempt. VAT on costs relating to zero-rated supplies is fully recoverable whereas VAT relating to exempt supplies is not normally recoverable. The input tax will have to be adjusted under CGS. Further information on how CGS is to be applied is provided in the Partial Exemption Guidance at PE5270.