Supply of property
When is a property completed for VAT purposes?
Completed in the context of Value-Added Tax (VAT) on property means that the development of the property has reached the stage where the property can effectively be used for the purposes for which it was designed. In all cases, one essential requirement for completion is the connection of all of the utility services that will enable the property to be used for the purposes for which it was designed.
The physical state that the property is in when completed, and the degree of finishing and fitting that will have been carried out, will depend on its intended use and may vary from one type of building to another. Finishing and fitting work that is normally carried out by the person who will use the property, whether as owner or tenant, does not itself have to be completed for the property to have reached the point of being completed.
The five-year rule for taxable supplies of completed property begins from the date of completion.
Note: The two and five-year rules do not apply to sites. For example, if a person carries out engineering work on or over a site, this would constitute development for VAT purposes. The sale of this site is subject to VAT for a period of 20 years from when the development work is completed.
- Example
D Ltd constructed buildings side by side at numbers 7 and 9 Main Street. Number 7 is a small commercial building with planning permission for a shop on the ground floor and an office on the floor above. Number 9 is a two-storey building with an apartment on each floor.
The development of both has reached exactly the same point:
outsides are painted
doors and windows have been fitted
the plumbing and wiring are in place and have been connected, but no internal finishing work such as plastering has been carried out.
Number 7 has been completed as it has been finished to the level expected for a commercial unit. Number 9 is not completed because all finishing or fitting work on residential property is not normally carried out by the person who will occupy it.
When is the supply of a completed property taxable?
A supply of a completed property in the course of business is taxable while the building is new. If development work is carried out to the property, not being minor development work, the property is again regarded as new from the date of completion of that development work.
A completed property is regarded as new for a maximum period of five years from completion. However, once the property has been disposed of to an unconnected person, the period during which the property is regarded as new is restricted to the period covering the first 24 months of occupation of the completed property.
It should be noted that if part of a building has been occupied for more than 24 months and part has not, then the consideration for sale is apportioned between the part of the building that is taxable and the part of the building that is exempt.
- Example
Taxable supply of completed building: 5/2 year rules
D Ltd constructs a property that is completed on 1 April 2010. D Ltd sells the property to E Ltd (an unconnected company) on 23 July 2010. As the sale is made in the course of a business by D Ltd and is within the period when the property is considered new (first sale within five years of completion), it is taxable.
E Ltd occupies the building on 1 September 2010. It subsequently sells the property on 31 May 2011 to F. The property is still considered new at this time since the sale is made within five years of completion and the property has not been occupied for a period of 24 months following completion, so the supply is taxable.
F occupies the building on 1 July 2011. It then sells the property on 1 November 2012. At this point there has been an aggregate of more than 24 months occupation (nine months by E Ltd and 16 months by F: the month of June 2011, between the periods of occupation, is not included) so the property is no longer considered new. Therefore, the sale is exempt.
What is the position where a property is not completed at the time of supply?
The supply of a developed, but incomplete, property that is made in the course of business is taxable for 20 years from the date the development ceased. The two and five-year rules only apply once the property has been completed.
- Example
Sale of uncompleted building
D Ltd begins construction of a ten-storey office block in early 2011. The partially completed building is put on the market for sale. In February 2018 another builder buys the uncompleted building. The sale is taxable as the building was never completed, so the five-year rule does not apply.
Are there any further exceptions to the two-year, five-year and 20-year rules?
Yes. Where the property is residential property, the supply by the person who developed it in the course of business (that is, a property developer), or by a person connected with the property developer, is always taxable. The two-year, five-year and 20-year rules do not apply to supplies of residential property by a property developer, builder.
- Example
Sale of residential property by developer
Developer A develops 40 houses with a view to sell. They are all completed in June 2011. She sells most of the houses, but lets three of them which she subsequently sells in 2017. The sales of all the houses are taxable since the two and five-year rules do not apply to a developer or builder selling residential property.
Because the lettings are exempt she has a Capital Goods Scheme (CGS) adjustment in respect of the three houses for the duration of the letting. These CGS adjustments are the normal annual adjustments based on a claw-back of 1/20 of the VAT deducted.
Next: What does 'occupied' mean for VAT and property?