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HMRC have confirmed they will accept that a deposit to buy land paid by a registered social landlord (RSL) to a developer can still qualify for zero VAT rating as relevant to the construction of a new dwelling, even if there has been no building work carried out on the land at the time the deposit is paid.
This is conditional upon there being a clear intention to build dwellings on the land, so that at the time the land sale is completed, there will be at least a partly completed new dwelling on the site.
The phrase that is associated with a partly completed new dwelling in the construction industry is ‘golden brick’, meaning the building work has progressed beyond the foundation stage.
So as long as the completed sale of the land takes place when the project has reached the ‘golden brick’ stage, both the deposit and completion monies can be zero rated.
If the nature of the project has changed, or no building work has taken place when the land sale is completed, then the VAT treatment of the deposit will need to be reconsidered.
Independent VAT consultant Neil Warren explained: ‘In the past, this type of transaction was not a problem because the seller of the land did not tend to receive the deposit money until the transaction was completed.
'But in the difficult economic climate, where cash flow is crucial, it has become more common for the deposit money to be made available to the developer.
'This receipt of money then creates a tax point for VAT purposes that needs to be considered as to whether it is zero rated, exempt or standard rated.
'The flexible approach shown by HMRC in allowing developers to look at the final outcome of the transaction is very sensible,' said Mr Warren.
