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HMRC Brief 54/08 provides guidance for house builders who have built or are building new dwellings with the intention, when they are completed, of selling either the freehold interest or a long lease of over 21 years (at least 20 years in Scotland) in each of the properties. Several such house builders have sought guidance on whether HMRC consider certain transactions involving the supply of new dwellings to be abusive. Those situations that HMRC consider not to be abusive are highlighted in the new guidance.

HMRC have been asked about the possibility that house builders might, in advance of any short term lets, make the first grant of a major interest in the completed dwellings to a connected person, who would not be a member of a VAT group with the house builder. This zero-rated sale might remove the need for the kind of adjustments explained in Information Sheet 07/08.

The suggestion put to HMRC is that the connected person would then rent out the properties until such a time as they could be sold. The rentals would be exempt and not give rise to input tax deduction on ongoing costs including the costs of the eventual sale (for example estate agency and legal costs). However, deduction of the VAT associated with the original construction would have been secured.

For a scheme to be abusive, it must (as well as having the essential aim of saving VAT) produce a result contrary to the purpose of the VAT legislation. HMRC believe that Parliament intended that the construction of new dwellings should be relieved from VAT. The first grant mechanism introduced by Parliament does achieve this but it relies on the assumption that there will always be a grant of a major interest around the time the dwelling is complete, so ensuring deduction of VAT on all appropriate costs.

In HMRC’s view, the arrangement set out in the first paragraph above does not produce a result contrary to the purpose of the legislation, but rather ensures that a transaction of the kind Parliament envisaged will actually take place at the appropriate time. That view rests on the assumption that the purpose of the zero rating provisions associated with new dwellings is to relieve fully from VAT the provision of precisely that – new dwellings. That means that all the costs (save on blocked goods such as washing machines, carpets etc – see Section 13 of Notice 708 Buildings and Construction for more details) associated with producing a new house should either not carry VAT, or carry VAT that is deductible in full.

However, whilst HMRC believe it is the policy objective that new dwellings should be zero rated, that does not extend to other goods or services that might be packaged up with the supply of a dwelling. HMRC consider it abusive when a major interest is granted with an essential aim of deducting VAT on costs such as repair, maintenance and refurbishment of dwellings (other than for remedying defects in the original construction) the relief of those kinds of costs not falling within the policy objective as we see it. These types of arrangements are likely to be challenged.

For further information and advice contact the HMRC VAT and Excise helpline on Tel 0845 010 9000.