Real Estate

Businesses in every sector are involved in property transactions. The values involved are often high so it’s essential to get the treatment right. A clear understanding of the VAT treatment is essential for businesses which cannot recover all their VAT but even businesses which can recover VAT can suffer an unexpected VAT cost if VAT is not factored into their decision making.

The default treatment is that:

• supplies of land / buildings are exempt from VAT and
• construction costs are standard rated

However, there are many exceptions to this depending on a range of factors including:

• The nature of the property concerned;
• The use to which it will be put;
• The nature of the supply being made;
• Whether the supplier has opted to tax (ie charge VAT);
• Whether that option will be disapplied (which in turn depends on a range of factors).

Sometimes the analysis of the above factors will be clear. In other cases, a judgement must be made. This analysis will determine whether it is a supply of land at all and, if it is, what the VAT liability is.

In some cases, it is open to the parties to a transaction to structure a transaction in a way which is more VAT efficient by varying one or more of the above factors.

Even if it is not possible to vary the commercial structure it is essential to understand the implications of the transaction to ensure that VAT is accounted for correctly as the values involved are often significant. Failure to account for VAT correctly could result in penalties and interest and more seriously have a commercial cost if the transaction is negotiated without a full understanding of the VAT analysis.