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The VAT treatment of deposits for land on which dwellings will be built

Where dwellings are to be built on bare land, it is common practice for completion to take place once a meaningful start has been made on the construction.

This usually means the houses have been built to at least one course of bricks above the damp proof course.

The reason for this is that HMRC accept the supply to be of ‘partly completed dwellings’ and thus zero-rated.

The arrangement is referred to as ‘golden brick’ and is normally used by registered social landlords planning residential developments because, in the vast majority of cases, they would only generate exempt rents from the completed dwellings and consequently, any VAT the incur on development costs would be irrecoverable.

A question has now been raised regarding the VAT treatment of deposits paid otherwise than to stakeholders, often at exchange of contracts when no start has been made on construction.

HMRC have confirmed that if it is clear from any contract or agreement that there will be a zero-rated supply at completion, i.e. partly completed dwellings, the deposit represents consideration for the same supply.

In other words, if a deposit is paid and construction has not started, but the intention is to sell partly completed dwellings with ‘person constructing’ status (a condition for zero-rating), the deposit is zero-rated.

This type of arrangement can potentially be far more complicated than the basic structure set out above. On occasions, the original intention can change so that the planned zero-rated sale of partly completed dwellings does not take place. If that happens, HMRC say it will be necessary to revisit the VAT treatment of the deposit so that if reflects what actually happens.