Developers: How to tackle tax during COVID-19

Developers: How to tackle tax during COVID-19

COVID-19 has led to a slowdown in the residential sales market. As a result, many developers are turning to letting their completed units on short-term leases to temporarily prop up their revenues. However, this switch in approach isn’t quite that simple. To ensure it is commercially viable, and acceptable to HMRC, developers must know the VAT implications.

Beware of clawback adjustments

Clawback adjustments are when a taxable person changes the use of the goods or services they are providing, so their VAT liability changes from taxable to exempt and a repayment is required to HMRC.

Newly-built residential properties that are sold or let on a long lease (over 21 years) are classed as zero-rated supply. Simply, this means the owner doesn’t need to add VAT to the sale price and can recover any VAT incurred during construction (input VAT).

However, letting a property on a short lease makes it an exempt supply, so VAT does not need to be added to the sale price, but input VAT cannot be recovered.

As developers tend to recover input VAT during the construction process, changing their intention from selling to letting on a short-term lease will lead to clawback adjustments.

Read more about our residential development team.

Relief is available

The 2008 financial crisis led to the government introducing a concession that allows developers to let their housing stock without clawback. This concession means that HMRC look at just a decade’s worth of receipts when calculating clawback, enabling developers to pay only partial clawback of input VAT if they are letting a property for less than ten years.

However, developers must record their intention to let the properties only until the market picks up.

Issues regarding land promotion agreements

Promoters’ fees – A payment by a promoter to the landowner, which represents an advance on what the landowner will receive after the land is sold with planning permission.

It is often assumed that VAT is due on the promoter’s fees payment, but this isn’t necessarily the case. VAT suggests a service is being supplied to the promoter, but the payment can just be a way to entice the landowner to enter into a promotion agreement. Therefore, it can be argued that VAT isn’t due.

For landowners selling land to developers before construction starts, it is important to register for VAT and make a VAT election, ensuring VAT charged by the promoter can be recovered. 

Stamp Duty Land Tax (SDLT) considerations

In 2004, the Government imposed an SDLT charge on developers, even if the land is sold directly to the end buyer. Under this legislation, the developer is also deemed to have acquired the land, and so they must file an SDLT return if the chargeable consideration is over £40,000.

We’re here to help

Having a clear knowledge of HMRC’s guidance can help developers make informed decisions and optimise their tax position during this uncertain period.

Sign up for our free 20 minute webinar on VAT and stamp duty land tax issues for developers, house builders and landowners on Tuesday 28 July or learn more about how our team of corporate tax specialists can help.

Contact us
For further information please contact Oliver Gutman or another member of the corporate finance team.

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