Q: My client is a residential property developer, building, and then selling, new dwellings. They have recently found some development land for £300,000 + VAT as the vendor says it has opted to tax. Can my client disapply the vendor’s OTT as they intend to build houses, and if not, does my client need to OTT in order to claim back the VAT?
A: Your client will not be able to disapply the vendor’s option on the basis of using the purchase for new dwellings; this is only possible when buying a building for conversion to dwellings, or bare land bought by a DIY housebuilder or relevant housing association. Your client will, however, be able to recover the VAT on the purchase on the basis they intend to use the land to make (zero-rated) taxable supplies (of the first grant of a major interest in a new dwelling that falls within Notice 708 section 4.1.2). There is no need for your client to opt the land to recover the VAT on the purchase if this zero-rated intention remains. If, however, within 6 years of purchase, and before the zero-rated sale is made, the client changes their intention and decides to use the land for exempt or non-business purposes (e.g. sell the bare land un-opted, or build the dwellings and rent them on short residential lets) an option to tax may help at that time (e.g. to make the sale of bare land taxable at the standard-rate). Otherwise, they would have to revisit the VAT initially recovered on the purchase under the 6-year payback/clawback rules (see VAT Notice 706 section 13.6).
Disclaimer
These publications from Markel Tax were correct at the time of going to press and should be considered as principles-based guidance only. To check current validity, call the Markel Tax helpline. ICAEW (as distributor) disclaims all liability for any errors or omissions.
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Markel Tax offers expert advice on UK tax and VAT via its helpline and provides monthly FAQs with questions and answers on common tax issues for businesses and practitioners.
