Andrew Needham looks at what is known as the ‘golden brick’ and its effect on the VAT treatment of new residential property in the construction industry.I t is not uncommon, in these cash-strapped times, for construction companies to start work on a housing project and either run out of money or stop building due to a lack of demand for the houses.
Example: Part-Built Properties
A construction company (Buildit) buys a piece of bare land that the seller has opted to tax, so the purchase is plus VAT. Buildit obtains planning permission to build ten houses and starts construction, recovering the VAT on the purchase price based on the future zero-rated taxable sale of the houses. After six months, they run out of cash and decide to sell the part-built properties to another construction company. The foundations for all ten houses have been laid and five of them are built to nearly first floor level. Buildit has not opted to tax (there was no need; they thought they were going to sell zero-rated houses) and now it is going to sell the partcompleted construction site. It has been advised that it will either have to opt to tax and charge VAT to the purchaser or make an exempt supply of the property and repay the VAT it has claimed on the purchase of the land and the construction so far as it relates to an exempt supply – so, what should it do?
The law states that you can zero-rate the first grant of a major interest, which is a freehold sale or a lease exceeding 21 years (20 years or more in Scotland) in a new residential building. But how do you get a zero-rated sale when you have not completed the houses? To do this, the seller must be seen as ‘constructing’ the building or buildings. The VAT Tribunal has held that “a building must be seen to be under construction on the land”, and HMRC states: “This is usually when walls begin to be constructed upon the foundations. These walls need not be above ground level”. Hence the term ‘golden brick’.
So how does this affect Buildit, as some of the houses have at least one metre of walls constructed, while the others are still only at foundation level? Buildit does not want to opt to tax the property as this will add to the costs of the purchaser, but does not want to pay back half the VAT it has incurred so far (half the building has progressed beyond the ‘golden brick’ stage). Buildit agrees with the purchaser that before completion, they will lay a couple of rows of bricks on the existing foundations, so that all properties are beyond the ‘golden brick’ and the whole project can be zero-rated. This way there is no VAT for the purchaser to pay and VAT to be paid back by Buildit.
More Good News
The zero-rating does not just apply to Buildit. The new owner can complete the project and when it sells the completed houses, these will still be zero-rated supplies so it can recover all the VAT on its costs. Even better, if the new owner decides it cannot complete the project and sells on to a third developer, this sale can be zero-rated as well as the final sale of the completed houses.
Deposit Paid Before ‘Golden Brick’
HMRC’s view is that where the deposit is released to the vendor, and it is clear from the contract that what will be supplied at completion will be partly completed dwellings (i.e., beyond ‘golden brick’), the deposit is part-payment for the grant or supply that will occur at that time; as such, zero-rating will be appropriate.
A construction business should make sure it has constructed the houses above foundation level and it can zero-rate the sale and save VAT.