A perennial problem for developers is the cost of incurring VAT upfront when acquiring a bare or existing commercial site for redevelopment. Often, the seller will have exercised an option to tax over the property, meaning that VAT is payable on the purchase price at 20%. While this is usually a recoverable cost, stamp duty land tax (SDLT) is chargeable on the VAT-inclusive purchase price, and so paying VAT can lead to higher SDLT for the developer.
There are two situations in which a developer can avoid this VAT where some works have already commenced on site:
- once the development has reached “golden brick” stage; or
- if the works are sufficient to constitute a business that can be transferred as a going concern.
Golden brick planning
The first grant of a “major interest” in land by a “person constructing” a building designed as a dwelling or as a number of dwellings (or converting a non-residential building or part thereof into a building designed as a dwelling or a number of dwellings) is eligible for privileged VAT treatment. This privileged VAT treatment allows the seller to charge VAT to its buyer at a zero rate, meaning that the seller can recover all of its VAT without the buyer actually having to incur the VAT.
A building that is partly constructed can still qualify for this status. In practice, the first grant of the major interest can be zero-rated where the building is “clearly under construction”, which HMRC considers to be the case only once construction above foundation level has commenced.
Thus, the first brick to be laid on the foundations is the “golden brick” that allows the seller to zero-rate its sale.
Transfer of a going concern
Where the construction falls short of golden brick stage, all hope is not lost. The activities undertaken by the seller may still count as a business for VAT purposes that is capable of being transferred as a going concern (TOGC), and therefore VAT-free.
In the case of The Golden Oak Partnership, the First-tier Tribunal concluded that a TOGC had taken place in respect of a transfer of partially developed land. The partnership acquired land for development in three phases, obtained outline and detailed planning permission, carried out infrastructure works and then disposed of the Phase II and Phase III land before completing the development. In addition to incurring expenses on fees for planning, architects, surveyor, structural and heating engineers, the following infrastructure works had been completed by the partnership selling the land: existing buildings had been demolished;
- a road and driveways had been constructed serving all three phases of the site;
- an electricity substation and gas meter station had been built on Phase II;
- an underground sewerage pumping station had been built to serve Phases I and II; and
- piping from the pumping station to public sewers had been installed.
The factual finding by the Tribunal was that the property was, at the time of the transfer, “in the course of active development by the partnership”, and therefore that the sale of the land did amount to a TOGC.
However, in other cases, the Tribunal has reached the opposite view. In the case of Gulf Trading and Management Limited the Tribunal found that the works which had been undertaken prior to sale were too insufficient to constitute a business. Thus, the “vital” factor present in The Golden Oak Partnership case – that the land was in the course of active development – did not exist as a matter of fact. In this case, the taxpayer had carried out the following activities prior to selling the land:
- obtaining planning permission;
- inspecting the soil; and
- erecting fencing to secure the plot.
Obtaining planning was found not to be relevant on its own to the question of whether active development was taking place, because it is common for sellers to seek planning permission prior to the sale of land. The inspection of the soil and the putting up of the fence were found to be “minor and insignificant” acts. Accordingly, the land was not being actively developed and there was no going concern being transferred.
These cases demonstrate that HMRC and the Tribunal will look carefully at the facts of each case. The potential availability of TOGC treatment is easily overlooked on the transfer of partially developed land and should always be considered by the parties and their advisers.