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HM Revenue and Customs Brief 54/08


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Issued 28 October 2008

VAT - New zero-rated dwellings – whether arrangements are abusive

  1. This brief is 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.
  2. Several such house builders have sought guidance on whether HM Revenue & Customs (HMRC) considers certain transactions involving the supply of new dwellings to be abusive. This brief identifies those situations that HMRC considers not to be abusive.


  1. The first grant of a major interest (freehold sale or a long lease of over 21 years (at least 20 years in Scotland)) of a new dwelling is zero rated. This allows the house builder to recover all the input tax they have incurred in connection with the development (subject to the normal rules about blocked input tax) and to sell the dwelling without adding VAT.
  2. In the current economic climate, many house builders have found that they are unable to sell new dwellings. For most, this leaves them with the choice of leaving them empty until they find a buyer, or renting them out in the short term while they wait for the housing market to recover in order to sell them.
  3. Revenue & Customs Brief 44/08 and Information Sheet 07/08 (both published on 15 September 2008) provide guidance for house builders renting out new dwellings on short term lets while retaining the intention to sell a major interest in the dwellings when the markets recover. As those documents explain, short term lets of this kind can sometimes give rise to adjustments of input tax previously recovered.

Approach made

  1. 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. We have been asked whether we would see this arrangement as abusive from a VAT point of view. This brief does not attempt to address any other tax consequences that might flow from such transactions or any commercial or legal issues.

Is this intended structure abusive?

  1. 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.
  2. In HMRC’s view, the arrangement set out in paragraph 6 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.
  3. However, whilst we 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.


  1. In short, HMRC agree that the arrangement outlined in paragraph 6 above is one that they would not see as abusive and so would not seek to challenge. However, if the VAT deducted goes beyond the VAT that would normally be deducted in relation to the supply of the new dwelling (for example VAT on costs such as repairs, maintenance or refurbishment, which is not normally deductible) such arrangements are likely to be challenged as abusive.

Further information

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

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© Crown Copyright 2008.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.

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Article Published/Sorted/Amended on Scopulus 2008-11-03 19:10:24 in Tax Articles

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