One of our key pieces of advice to the accountancy firms we work with, is to encourage their clients to seek VAT advice as early as possible. This is crucial for development projects, buying or selling land and here’s why:

• Land and construction supplies can be subject to full rate VAT, zero-rated, reduced rated or exempt, affecting both the VAT incurred and the VAT recovery position.
• Proper structuring can help maximise reclaiming potential of VAT on materials and services. Without proper planning, VAT costs might not be recoverable, increasing expenses and sometimes making the project over budget, loss making or in the most extreme of scenarios business ending.
• VAT must often be paid upfront before reclaiming it, which can create cash flow challenges. Advance planning ensures you have the right strategy can help budgeting, cash flow and can avoid unnecessary financial strain.
• Depending on the nature of the project, registering for VAT may be optional or mandatory. Incorrect VAT handling can lead to penalties or unexpected tax bills so ensuring compliance is essential.
• VAT treatment differs for selling, leasing, or using the property within the business and the impact of these can have financial consequences. Certain decisions (e.g. opting to tax a property) can affect future VAT obligations.
• Some contractors apply VAT differently based on the project type. Misunderstanding supplier VAT treatment can lead to disputes or financial loss.
• Finally, errors in VAT treatment can lead to HMRC investigations, penalties, and unexpected tax liabilities.
• Multi stage projects, can have early transactions which fix the VAT treatment of later transactions, such as agreements to sell land that has not yet been acquired. Failure to seek VAT advice before the transaction can lead to missed opportunities for VAT recovery but more often lead to over-claiming of VAT. Once contracts are signed there is usually no going back!
• To avoid any of these mistakes, encourage your clients to seek advice about the potential issues that may arise and actions that need to be taken early on before signing anything or embarking on building works.

Case In point: VAT Implications on Land Sale and Development

A client planned to buy land with an existing dwelling and initially intended to build an additional property. They incurred costs (planning, feasibility, design) and recovered VAT during the process.

However, after gaining planning permission, they chose to sell the land directly to a developer instead of developing it themselves. Before acquiring the land, they signed an onward sale agreement and received payment. Because they had not opted to tax the land before receiving payment, an unintended and irreversible VAT liability arose.

As a result, the client must repay all VAT previously recovered on planning and land-related costs, significantly reducing profits.

Fortunately, the situation could have been worse: the sale contract prohibited opting to tax. Had they opted to tax earlier, VAT would have been due on the agreed selling price (stated as VAT-exclusive), creating a larger financial loss and possible liability for the buyer’s extra SDLT.