BB/23B/06 VAT—first grant of a major interest in residential property—attribution of input tax and the Capital Goods Scheme
Business Brief, Issue 23. 22 December 2006
This Business Brief article confirms and explains HMRC policy regarding input tax incurred on the construction of residential property where the developer sells a long leasehold interest separately from the freehold interest.
The first grant of a major interest (freehold sale or lease exceeding 21 years) in residential property by its developer is zero-rated, under VATA 1994, Sch 8, Group 5. However, all subsequent grants in the property are VAT exempt. VAT on costs relating to zero-rated supplies is fully recoverable whereas VAT relating to exempt supplies is not normally recoverable.
Detailed rules on the liability of supplies of buildings are in Notice 708 “Buildings and construction” (Part V8), on partial exemption in Notice 706 “Partial exemption” (Part V8) and on the capital goods scheme in Notice 706/2 “Capital Goods Scheme” (Part V8).
Attribution of input tax
When a residential property is constructed or results from the conversion of a non-residential property and the developer makes a first grant of a major interest in that property, any input tax incurred is recoverable in full. This is because the input tax is wholly attributed to that taxable first grant.
This is the case even where the value of the first grant does not represent full equity in the