HMRC internal manual

VAT Construction

VCONST03700 - Zero-rating major interest grants in buildings: first major interest grant in, or in any part of, the building, dwelling or its site

Restriction to the ‘first’ major interest grant

Notice 708 Buildings and construction explains the extent to which zero rating is limited by the concept of ‘first major interest grant’.

First major interest grants and VAT Groups

For VAT Groups you can disregard any grants (including assignment or surrender) of a major interest in the building that take place within the VAT Group.

Note: The company making the grant to a person outside of the VAT Group must meet all other tests for zero rating, including being the ‘person constructing’ the building (VCONST03580).

Meaning of ‘site’

There is no statutory definition of ‘site’. We have adopted the view of the Tribunal Chairman in Stapenhill Developments Limited (VTD 1593) who stated:

In our judgment it is incorrect on the ordinary meaning of words, which are ‘the building or its site’, to attempt to attribute the word ‘site’ the meaning that it refers to the whole acreage of a development site in relation to a single building constructed thereon. We think that the site of a building in the context of the provision means a reasonable plot of land surrounding the building. What is a reasonable plot must depend on the size, nature and situation of the building and the nature of the surrounding land.

In most cases the land purchased will be a ‘reasonable plot’, for example a new house including a garden.

Occasionally, additional land, such as paddocks or pastureland, may be conveyed with a new house; the additional land is not part of the ‘reasonable plot’ of the dwelling and is not zero rated.

Building land sold with back-to-back construction contracts

Developers who own ‘land banks’ are often reluctant to sell their land to potential house owners, such as housing associations, without also entering into a contract to build the houses.

Here the two transactions must be dealt with separately and the liabilities determined accordingly. The European Court of Justice has confirmed this in Kerrutt v Finanzamt Mönchengladbach-Mitte (Case C-73/85).

Remember, if the grant of the land is of a partly constructed building it may qualify for zero-rating (VCONST03550).

The liability of grants in land is explained in the VATLP - VAT Land and Property guidance.

There may also be partial exemption implications. For more information on this, check the Partial Exemption Guidance.