If I have succeeded in having you read this far in the hope of insightful comment on the state of our national game then I have done well. Using a headline with a suggestion of some sort of intimate physical contact is more effective (so I’m told) but causes more issues with corporate spam filters. However, if you can bear the football themed punnery then I hope to share some inside tips on managing VAT costs - and the title ‘A Case about VAT’ might have been somewhat less appealing...
Keeping a clean sheet
For residential developers the holy grail of property development is to ensure that the end product of your works is a zero-rated (as opposed to exempt) supply of a completed dwelling. This then enables the developer to recover the standard rated input cost of construction works (at 20%) but without a corresponding output charge to the home-buyer (and thus avoiding making an already expensive item even more costly). To meet the requirements for successfully recovering that input VAT, it is essential that at the relevant time, the taxpayer is ‘constructing a building designed as a dwelling’ (see Value Added Tax Act 1994 (VATA) Schedule 8, Group 5).
In many instances this should be self-evident (if it looks like a house, then chances are it is one). However, matters become complicated where the supply (i.e. sale) is of something less than a finished dwelling. A recent case  illustrates how the tax Tribunal interprets that phrase and the cost of getting it wrong.
Over the wall
Here a property developer began construction of a residential property. Having presumably been made an offer it couldn’t refuse, it sold the site to a third party for them to carry on and complete the development. The developer then submitted a tax reclaim for around £13,000 worth of VAT incurred up to the date of the sale. HM Revenue and Customs (HMRC) challenged the reclaim on the basis that there was no ‘dwelling’ within the meaning of the legislation, as only a boundary wall, dividing the site from the adjoining property, had been constructed at the point of sale. Those familiar with development sales to registered providers will be aware that HMRC does not insist on total completion of a residential structure before the reclaim can be made. In its internal guidance HMRC acknowledges the existence of so-called ‘golden brick’ sales where the developer completes the structure to a certain point in order for the zero rating treatment to apply (albeit for different reasons). However, golden brick arrangements have always focussed on the part-construction of the actual residential accommodation itself (i.e. the houses have had foundations laid and the walls part-constructed). Here the Tribunal was asked to consider whether an ancillary feature could still constitute a ‘dwelling’.
Tipped over the bar
In what initially looked like a sure fire top corner winner for the developer, the Tribunal found that there was nothing in the legislation that prevented the boundary wall being a part of the dwelling to be constructed on the site. The wall had been built in its entirety at the time of the sale and was shown in the plans which accompanied the planning application as part and parcel of the overall development. However, just when the developer thought it was all over, the Tribunal turned its attention to another part of the legislation (the notes to the relevant part of the Schedule in VATA). These defined the meaning of the phrase ‘designed as a dwelling’ as including, amongst its various preconditions, a requirement that:
“statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.” (Notes to Group 5, paragraph (2)(d) – the highlighting was that made by HMRC in its submissions).
When the Tribunal reviewed the terms of the original planning consent it noted that amongst the specific requirements of the consent was a condition that:
“No development shall take place until full details of both soft and hard landscaping…have been submitted and approved…by the Borough Council…. This scheme shall include indications of all…walls.”
You may well be able to guess what is coming already; the condition was ultimately approved by the planners but this did not happen until after the wall had been erected. This meant that the crucial ‘past tense’ element of the notes had not been met, and so HMRC was entitled to disallow the developer’s claim.
Sick as a parrot
It is perhaps easy to dismiss this as a one-off, fact specific incident of an unlucky developer being caught out on a technicality. You may be right, or this might just be the kind of ammunition that HMRC will look at to open up reclaim cases to pour over the planning details for some way of disallowing an otherwise proper claim. It is not unusual for developers to change schemes, or vary planning permissions, during the course of development. It will be as well for those out on site to be liaising with the back office team to make sure they’re not caught on the break.