HRMC have issued Revenue & Customs Brief 54/08 in response to requests for guidance on whether certain transactions involving the supply of new dwellings are considered to be abusive.

The brief is for house builders who have built or are building new dwellings with the intention, when they are completed, of selling either the freehold interest or a long lease of over 21 years (at least 20 years in Scotland) in each of the properties. The Brief identifies those situations that HMRC considers not to be abusive.

The first grant of a major interest (freehold sale or a long lease of over 21 years (at least 20 years in Scotland)) of a new dwelling is zero rated. This allows the house builder to recover all the input tax they have incurred in connection with the development (subject to the normal rules about blocked input tax) and to sell the dwelling without adding VAT. In the current economic climate, many house builders have found that they are unable to sell new dwellings. For most, this leaves them with the choice of leaving them empty until they find a buyer, or renting them out in the short term while they wait for the housing market to recover in order to sell them.

HMRC have been asked to comment on the situation where house builders, in advance of any short term lets, make the first grant of a major interest in the completed dwellings to a connected person, who would not be a member of a VAT group with the house builder. This zero-rated sale might remove the need for adjustments of input tax previously recovered on making short term lettings as outlined in Revenue & Customs Brief 44/08 and Information Sheet 07/08. The suggestion put to HMRC is that the connected person would then rent out the properties until such a time as they could be sold. The rentals would be exempt and not give rise to input tax deduction on ongoing costs including the costs of the eventual sale (for example estate agency and legal costs). However, deduction of the VAT associated with the original construction would have been secured.

Based on the facts in the Brief, HMRC have stated that this arrangement is one that they would not see as abusive. However, if the VAT deducted goes beyond the VAT that would normally be deducted in relation to the supply of the new dwelling (for example VAT on costs such as repairs, maintenance or refurbishment, which is not normally deductible) such arrangements are likely to be challenged as abusive.

For full details see
http://www.hmrc.gov.uk/briefs/vat/brief5408.htm