Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

VAT Partial Exemption Guidance

From
HM Revenue & Customs
Updated
, see all updates

Guidance for specific trade sectors: land and property: an overview of different land and property businesses

Land & property businesses are frequently involved in a wide range of activities, making substantial taxable and exempt supplies. Their diversity makes is difficult to specify which partial exemption methods are likely to be most appropriate, but the issues that should be considered are given below. In broad terms, Land & property businesses fall into the following different categories:

The developer

Tends to be a business, rather than an investor, for corporation tax purposes. A developer typically identifies sites, acquires land, obtains planning permission, builds out and either sells the completed property direct to the occupants or finds tenants and then sells its interest in the property. A typical purchaser could then be an institutional investor such as a listed property company, an insurance company or pension fund.

The development may be speculative in that no known purchaser has been found at the time a commitment to development is made. In other cases the developer will only proceed to the development phase once a third party purchaser has been identified. The development can be commercial (office, retail, industrial, etc.), residential or a combination of both. The VAT liabilities of the supplies may differ as a consequence.

For VAT purposes, the input costs of a developer will fall within the Capital Goods Scheme if the developed property is leased to tenants before being sold, although the costs will tend to be revenue expenditure for normal accounting and corporation tax purposes. Input tax will be recoverable in so far as it is attributable to future intended taxable supplies. In many cases, the sale of the property to the investor will be as a transfer of a business as a going concern (a TOGC is a non-supply for VAT purposes).

The investor

Tends to be an investor rather than a business, for corporation tax purposes. An investor typically specialises in identifying investment potential from existing stock in the marketplace. It will tend to acquire properties on the open market or through auction, or by acquisition of existing property investment companies/vehicles, although it may on occasions enter into an agreement with a recognised developer to build out or redevelop a site acquired ultimately by the investor. The properties are often acquired as TOGCs.

Investment properties can be commercial (office, retail, industrial, etc.), residential, or a combination of both. The VAT liabilities of the supplies may differ as a consequence.

For VAT purposes, the input costs of an investor will fall within the Capital Goods Scheme if the property is acquired with VAT payable or acquired as a TOGC from someone for whom it was a capital item, although the costs will tend to be revenue expenditure for normal accounting and corporation tax purposes. Input tax will be recoverable in so far as it is attributable to taxable supplies.

The developer/investor

Tends to be an investor for corporation tax purposes, typically acting in much the same way as the speculative developer except that it will retain the property developed as an investment and derive its return from capital invested by way of rental income and service charges/additional rent. The developer/investor can be a single company established expressly for the development in question (and thus a new business, registering for VAT for the first time) or an existing property investor owning many properties.

The developments/properties can be commercial (office, retail, industrial, etc.), residential, or a combination of both. The VAT liabilities of the supplies may differ as a consequence.

For VAT purposes, the input costs of a developer/investor will fall within the Capital Goods Scheme, although the costs will tend to be revenue expenditure for normal accounting and corporation tax purposes. Input tax will be recoverable in so far as it is attributable to current or intended taxable supplies.

The dealer

Tends to be a business, rather than an investor, for corporation tax purposes. A dealer typically buys and sells land and properties and makes its money on the turn. Sales can sometimes be very quick, perhaps within a day or two of acquisition, or may take some months if a buyer needs to be found or if the dealer is waiting for market conditions to come right. A typical purchaser could be a developer, an institutional investor such as a listed property company, an insurance company or pension fund, perhaps an owner/occupier.

Properties can be commercial (office, retail, industrial, etc.), residential or a combination of both and may be occupied or empty. The VAT liabilities of the supplies may differ as a consequence. In many cases, the sale of the property will be as a TOGC.

For VAT purposes, the input costs of a dealer will only fall within the Capital Goods Scheme if the property is leased to tenants or used in some other way before being sold on. The costs will tend to be revenue expenditure for normal accounting and corporation tax purposes. Input tax will be recoverable in so far as it is attributable to current or intended taxable supplies.