Revenue & Customs Brief 36/09
VAT: the VAT treatment of deposits relating to sales of land on which dwellings are to be constructed
This Revenue & Customs Brief clarifies HM Revenue and Customs' (HMRC) view on how deposits paid in relation to sales of land, and in particular sales by developers to registered social landlords (RSLs), should be treated.
Background
Where development land is sold to RSLs, it is normal for a deposit to be paid at the time of exchange of contracts when construction has not commenced and the land is bare land. In many cases this deposit will be held by a stakeholder and will not create a tax point for VAT purposes until it is released to the vendor (or vendor's agent), normally at the time of completion. Completion of the sale will in most cases occur at a time when construction of the dwellings has commenced and progressed beyond what is commonly known as the 'golden brick', that is, beyond foundation level. This means the supply can normally be zero-rated.
It has, however, become increasingly common for the deposit to be made available to the vendor at the time of exchange when the land is still bare land. This has raised questions about the VAT treatment of the deposit, and in particular, whether it can be treated as part payment for the future zero-rated supply.
HMRC's interpretation of the correct VAT treatment
HMRC takes the view that where the deposit is released to the vendor and it is clear from the contract or agreement that what will be supplied at completion, or the time of the grant, will be partly completed dwellings (beyond 'golden brick'), the deposit is part payment for the grant/supply that will occur at that time. It follows that the VAT liability of the deposit is determined by the anticipated nature of the supply and that zero-rating will be appropriate if it is intended that the conditions for zero-rating will be satisfied at the time of completion. For example, there must be a clear intention that the vendor will have commenced construction of the dwellings at that time and acquired 'person constructing' status.
It is possible that the state of the land at completion will differ from that which was anticipated and where this is the case it will be necessary to revisit the VAT treatment of the deposit. It is not possible to give more detailed guidance as the position will depend upon the facts and contractual terms applicable in the particular case. Where taxpayers are uncertain about the correct treatment they should refer to the National Advice Service by phoning 0845 010 9000.
Issued 8 July 2009
