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HMRC internal manual

VAT Partial Exemption Guidance

Guidance for specific trade sectors: land and property: speculative costs/change of intended use/abortive costs

Whatever the method, it will need to take account of input tax that cannot necessarily be attributed to a specific supply at the time that the cost is incurred.

Developers especially will incur input tax on pre-supply costs. Initial attribution might need to be taxable, exempt, or residual depending on the circumstances.

Some land and property businesses incur VAT on costs without knowing what supplies will be made. For example, costs related to acquiring land for property development when it is not yet clear what type of project, if any, will take place. In these situations it is not possible for VAT to be directly attributed to either taxable or exempt supplies

Provided the costs are incurred for business purposes, the VAT can be treated as residual VAT relating to the business as a whole. Residual VAT can be deducted to the extent allowed by the taxpayer’s partial exemption method.

The VAT Regulations provide for input tax to be attributed initially according to its intended use, with the consequence that if the original intention changes, the earlier input tax attribution might need to be adjusted.

It is sometimes the case that input tax will never be used, for example where a potential development opportunity never gets off the ground and costs are written off.

These issues are covered in greater detail in PE61000 - Changes in intention or use.