VAT and land development

Daniel May, VAT Manager looks at VAT issues that developers need to consider.

27 June 2023 - Daniel May

In the post-pandemic economy, we are seeing many property developers who are now seeking to dispose of land previously banked for future development. This appears to be caused by concern over rising interest and material costs, coupled with a recent fall in housing prices.

Buying land for development may seem like a relatively straightforward transaction, but there could be hidden VAT snares which can trap the unwary developer. However, with some careful planning and good advice, this can usually be avoided.

When is VAT payable? 

The purchase of land, is by default, exempt from VAT. However, the current landowner may have chosen to exercise an option to tax over the land in the past, meaning that VAT must be charged at the 20% standard rate to the developer upon sale.

Where VAT is incurred, a property developer constructing new dwellings for onward sale is entitled to reclaim the VAT paid against the intended future zero rated income from the dwellings. This is usually legitimately reclaimed before construction even begins, to aid cashflow.

However – an issue may arise if, within six years of forming the original intention, and before first use, the developer changes their intention to sell the dwellings and instead decides to sell the land as a VAT-exempt transaction without having made an option to tax of their own.

This change of use and intention triggers a ‘clawback’ of the VAT meaning the developer must repay the VAT originally claimed upon purchase of the land.   In addition, input tax on related disposal costs, and even input tax incurred in the past which is no longer within the de minimis limits, may no longer be reclaimable.

Finding a solution

There is usually a solution, but it requires some careful consideration and advance planning with your Tax Adviser.

If the developer is able to make their own option to tax, they can convert the exempt supply to a taxable one. The option to tax is a relatively straightforward process but – inevitably – does not come without its own economic and tax-related risks.

For example:

  • If the buyer (the developer) is intending to make exempt supplies themselves, for example building dwellings to rent out), the increase in the sunken VAT cost could price them out of market for the land
  • Certain types of sales are not impacted by an option to tax such as sales of land to a housing association, or to an individual that intends to build their own dwelling. In such cases, the option to tax is disapplied and we are back to square one
  • Stamp Duty Land Tax (SDLT) must also be considered. SDLT is paid in relation to the VAT-inclusive sales price. The buyer could look to negotiate a reduction in price to compensate for the additional SDLT suffered as a result of making an option to tax
  • Except for the 6-month ‘cooling-off period’, an option to tax cannot be revoked for 20 years, so further changes in intention could be negatively affected
  • The option to tax must be made at the correct time and notified to HMRC in the correct manner

 Make the most of any golden bricks

Where a dwelling is being constructed and work has progressed above foundation level, the sale of that dwelling to a buyer who will continue the development, may be treated as a zero-rated sale – thus avoiding the potential issues of irrecoverable VAT for both buyer and seller. This concept is informally known as the ‘golden brick’.

Whilst this approach is generally accepted by HMRC, it is a complex planning opportunity. Therefore, it is recommended that professional advice is taken in respect the development before it is relied upon and as part of a proposed contract.

How can we help?

The purchase, development and sale of land & property can be a complex and costly business and one in which the services of a trusted professional adviser is crucial.

Whether you are looking to buy or sell land, develop property, or invest in a private rental portfolio, we have a team of specialists who have been selected from across our business for their experience in the sector and who are ready to help you with all aspects of your financial and business affairs.

Our land and property team includes tax, accountancy, insurance, and VAT professionals who have extensive expertise and knowledge of trends in this sector.

Please contact Daniel or a member of the tax team by emailing or calling 0330 058 6559


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