Property developers should take note of a little-reported VAT case, in which a fairly common VAT planning device has been challenged by HM Revenue and Customs as an ‘abuse’.
The case arose because a developer wished to build and sell holiday homes (which were to be built as such, the buyers not having the right to use them for year-round occupation) on land which had been ‘opted to tax’ for VAT purposes. Because the effect of the option would be to make the sales of the properties subject to VAT (which the buyers could not recover), the deal was constructed in two stages. In the first, the opted land was sold to the purchasers of the holiday homes and then a contract was made between a company related to the vendor of the land and the buyer for the construction of each property. This latter contract would be zero rated. Had the land and buildings been sold in a single transaction by the developer, the whole transaction would have borne VAT.
The VAT Tribunal concluded that the arrangement was an abuse and the entire transaction should carry VAT at the standard rate. Although an appeal against this decision, which seems unusually harsh, must be on the cards, developers in similar circumstances should take care not to compromise their position irrevocably until the result is finally decided.