Hello. My name is Oliver Gutman. I'm a tax partner at Shakespeare Martineau, and today on this webinar, I'm going to be talking to you about for a touch points that I believe will be of interest to developers. three of them relate to VAT, and one to stamp duty land tax. I'm going to be talking quite briefly about each of these points, but if you have any questions, please do. feel free to contact me. There is a Q and A icon. I believe, at the bottom of the screen. Please do use that to submit any questions.
So the first point, the first VAT point that I'm going to, that I'd like to cover deals with the issue of recovery for, for developers.
At the moment, with, with ... and with the situation in the housing market, developers may be considering generating revenue from housing stock that they were unable to sell by letting it out on a temporary basis until the housing market picks up.
Developers need to be aware that there's a potential VAT problem with that way. And the problem is, is this in a nutshell The sale or granting of a long lease with a term of more than 21 years over a newly built residential property is a zero rated supplies. It's called for that purposes.
And that means that the seller doesn't have to add VAT to the to the purchase price and doesn't have to account to the revenue for any for a VAT. But, nevertheless, it can recover the VAT that its suppliers have charged its its its input that as its co-ordinates. That might be everything from VAT on the purchase of the land itself to the IT, charged by builders beauty on building materials and on professional fees.
So, without having to take any any any particular measures, the developer who is selling built units will recover its input that in the ordinary course.
By contrast and the letting on a short-term basis of residential units is an exempt supply for that purposes, which means again in terms of it has the same effect in terms of the vat charged to the, to the to the tenant in this case rather than the buyer. The tenant doesn't pay in the vat and the Development Roads Freehold would be would have to account to the revenue for any of that. But in terms of input that the result is very different. Now the developer is making an exempt supply so we won't be able to recover its its input back to that charged to it by by its suppliers.
And, given that, in reality, the developer will have been claiming its input, that, as, as it's gone along, the, the effect of, it would have been, the vocal would, have been claiming, as fast as it's going along. On the basis, That, it will be making zero rated supplies, when it comes to sell the properties, that, the change of intention to one, of letting out the properties, even on a, on a temporary basis, causes a clawback adjustment as, it's called, an obligation to repay the input that claimed from the revenue to repay it back to the revenue.
That, that, that, that, that repayment can be very significant, can blow a hole in the in the whole financing of the development. And this was an issue that developers faced in the last financial crisis in 2008 and in response to concerns all developers put that were put to government at the time.
The government introduced a concession and that concessions still applies. Now the the concession has has two parts, first of all, the the, the, the revenue will, the revenue accepted, then, and now that you should look that in terms of working out what the, the, what, what rate of recovery is allowed to a particular business. Its so-called partial exemption rate in working out that partial exemption rate, The property development business, should look at the what, what use, it makes of a residential new residential unit over a 10 year period.
So, making an exempt supply, letting the property out for a year or two is only going to cause a 10% or 20% adjustment in the recovery rate. It's not going to completely eliminate vibe recovery, that was the first element of the of the concession.
The second element is that the government introduced a a de minimis threshold below which any any irrecoverable that will be ignored altogether and this and this will help smaller developers. If there.
If using that partial exemption calculation, they calculate their Irrecoverable vat to be £625 per month or less. The developer can just ignore that altogether and treat the whole of its input that as as recoverable.
As I say, that, that concessions still applies. I'm not sure how well known it is, but. Developers should be a be aware, both of the potential problem from this change of intention to two, from selling to letting, but also that there is a potential solution.
That's the That's the first point I wanted to cover. The second point also related to that is is the issue of VAT, on promoters, fees, fees, on promotion, agreements that developers and developers, especially promoters may enter into With with landowners.
Add a date, these might be.
Fees. Fees paid by landlords, by landowners. That's less common, but those would be fees actually paid for promotional work and or more commonly fees fees paid by the promoter, the core promoter fees, they're obviously not in reality fees for any, any, any promotion adhesive emotion services.
Dealing first with and payments. by landowners. And clearly those all payments for the services provided by the promoter, the services of doing promotional work. And that is a vegetable supply. So whether the landowner is these paying an upfront lump sum or or the the the share of the sale proceeds that the promoter receives in only the case, those all payments for a vegetable supply and the promoters should be giving the landowner that invoice and and and charging VAT.
In terms of the landowners abilities to to recover that that that cost indi in the unusual or the in the less common situation of the the landowner holding onto the land while the development actually what development is done. So, to develop for the landowner is selling developed units. or partially developed units or.
pocket dwelling residential units that that's at a zero rated supply by the landowner. So it would recover its fact costs. And that would include the the VAT paid to the, to the promoter. But more commonly of course, the landowner will be selling and bare land before any any building workers as has done. The sale will take place as soon as cutting permission has been granted. And that that's that would be an exempt supply unless the landowner LX. And the same thing. The only way for the landowner to to recovery costs is to do a battle.
The the more pressing point from a promoters perspective will be the fee would be the nature fee paid to the landowner. And I suppose the the the general thought is that that is a payment for some supply of services by the landowner. And therefore the landowner if it is registered should be charging VAT.
But I think there is an argument that if a fairly strong argument that A promoter could make to a landowner that the payment is actually just an inducement paid by the promoted to the landowner to persuade the landowner, to offer an incentive to the landowner to enter into the promotion agreement. And its principle of that law that an inducement payment is not payment for any supply. So said no. No. That is due.
Promotion of humans. as with everything else.
That they're obviously very facts fact specific and it will depend on the precise wording of the promotion agreement, but I think promoters should be aware that there is an argument that they can make to landowners that actually landowners shouldn't be charging promoters, VAT on, on, on, promotion fees, because they're not, they're simply not payment for for any supply.
The the final that topic that I would like to cover in this in this webinar is the the whole issue of the zero rating of golden brick supplies, so-called, meaning the the sale or or or grant of a 21 year lease 21 years or more, over the newly built properties.
All property is built to golden break, which means that the foundations have already been built and the walls are being started to be built on top of the foundations. Though. not necessarily to ground level. And the, that legislation. States that the, that, that, that, that sale or long lease or either off of an individual unit or all of, the whole site is a, is, a zero rated supply which, as I've already said, means that the, the seller can recover its, that costs without having to charge that to the buyer.
Yeah, so far. So so uncontroversial the 2 2 points I want to to to draw your attention to in the context of gold brick, supplies.
The first is that the revenue allows that A, it's a deposit paid by a buyer, typically. be a buyer of the host site deposit. Paid, even paid. Before the development has reached golden brick stage. The revenue accepts that. that will be part of the consideration for a zero rated for an overall zero related supply providing. It's clear that the developers intentions are to our to build, took golden brick beyond before completing on the land sale.
So the payment to the deposit early on is going to impact on the sellers recovery rate. And the second point I want to make on this is the vexed question of And what proportion of the units of the Resident residential Units in a development have to be built, have to have reached Goldenberg stage? And if the sale of the whole site is to be treated as as a zero rated.
They're all because it because, obviously, in reality, it's very unlikely that the development will be advanced every single unit at the same at the same speed of saying, at the same time, this is much more likely to certain areas of the site will be built. Before others.
There are differing views on, on this point. That I'm aware of, and frequently they quite contradictory views are supported by claims that the revenue has has accepted this. I am aware of the revenue accepting, that the sale of a site where 25% of the property, approximately 25% of the properties, had reached golden break. That that, that, that sale of the whole site, was, was zero rated to develop. A certain complex certainly can't be categoric about this, but I think that would be a reasonable position for a developer to take in, in, in, in submitting as fat returns.
OK, those are the only points that I intended to make on on VAT.
The final point that I'd like to cover is on stamp duty land tax, STL T and this is the, This is just to highlight to you the the so-called developers, S.d.l. teach George.
And when the c.l.t. legislation was introduced in 2003, the government quite quickly became aware of what is regarded as, as as tax avoidance. And that was the ability for developers to circumvent the c.l.t. charge by.
Entering into contracts with, with landowners, under which, rather than the developer actually buying the land and and then developing it and selling it on, the developer would simply build out under license and get to the landowner to sell the developed units. Or, the whole site. Once, it has been developed direct to the end, by the end, buyer would obviously pay C.l.t., under, under normal rules. But, the Government believed that, separately, from that, the developer ought to be paying c.l.t. and the government, at least rightly or wrongly regarded.
The, the, the developer built the Building license under, which the developer would enter the land, and do the construction work, as, as, in reality, a land transaction, and therefore, a means of c.l.t. avoidance.
So, in 2004, to counter this, the Government introduced: a new provision in the c.l.t.
legislation, Section 44 A of the Finance Act 2003, under which if there is a contract between one party, which will typically be the landowner and another party of the developer under which the latter party has the right to, to tell the landowner to sell their land to a third party.
Or where the developer has the right to dictate to the landowner that itself to a third party or to the developer itself. That that that contract, between the landowner, the developer is deemed for ...
DLT purposes is deemed to be an acquisition by the developer. And there's no s.d.l. T on the contract itself, but if the contract is is is substantially performed.
In other words, if the developer takes possession of the land, that that is the the substantial performance of a of a chargeable. Land transaction and STL is is is then do is Payable by the buyer of that deemed Land Transaction, the by being the develop.
So, 644 8 counters, or the intention is that a 60 foot wave does come to the, the fact that the, the developer never actually acquires ownership of the land.
Now, you've got, you've got all the hallmarks of a over. Land transaction is going to give rise to a c.l.t.
liability, but what the to the legislation doesn't say is what is the chargeable consideration for that land for the deemed land transaction deemed Acquisition?
But the Other, The legislation itself doesn't smell is that the, the explanatory notes to the, to the finance of 2004 that introduced the legislation, make clear that the the chargeable consideration on which s.d.l.
T has to be paid is whatever the developer pays to the landowner.
So there there is. A fairly straightforward way to circumvent this segment, any c.l.t.
liability in practice, but by getting the by removing any payment from the developer to the landowner. And instead having the, the sale, all the sale proceeds come in to the landowner itself and onto those seven proceeds. The landowner would pay the develop on, on that basis.
Although you've got a Section 44 a situation, you haven't got any chargeable consideration. All you've got is that the no quite proper situation where the landowner is selling land to a buyer and the buyer's paying STL to the developer is is getting paid for.
It's constructive and there's no, there's no deemed land transaction between the, or rather there's no deemed land transaction on which there's any charge for consideration payable by the developer. Those, those are the points that I wanted to cover. I hope there was something in those that you have found useful. As I said at the beginning, please do. Please do get in touch. If you have any questions or anything you want to discuss, please do visit our small on Demand pages on our website for webinars covering a wide range of legal topics.
Thank you for listening.