Pete bought a pub for £500k to do up and sell on. The vendor had opted to tax but the property included a flat so Pete only paid and recovered VAT on of the price. Within a couple of years he received an offer from a housing association that wanted to knock the pub down completely and build flats. They would present a certificate that would prevent Pete from charging VAT on the sale. The housing association would pay a deposit on exchange.
Capital goods scheme – potential impact on Pete
If you spend £250k or more plus VAT on a building and recover some of the VAT, if the extent to which you use the building for VAT purposes varies within the following 10 years, then you may have to:
- Repay some VAT if your taxable use decreases; or
- Claim additional VAT if your taxable use increases.
The issue of the certificate by the housing association would make Pete’s sale exempt. As a result, Pete has to repay of the VAT he recovered (£48k) as he is regarded as using the pub for VAT exempt purposes for the remaining 8 years of the 10 years covered by the capital goods scheme. He also has to pay back all the VAT he has reclaimed on his professional fees relating to the original purchase.
A solution – the “golden brick”
One possible solution is the “golden brick” technique. Far from being seen by HMRC as unacceptable tax avoidance, the golden brick is an approach on which it has published guidance.
If you are a developer and you sell the freehold or a long lease in a new dwelling, your sale is zero-rated rather than exempt. This means the sale does not trigger a capital goods scheme adjustment. (A long lease is one capable of lasting more than 21 years.)
Zero-rating also applies to a sale of a partly completed dwelling. So, if instead of selling the existing building Pete sells partly completed flats to the housing association, he will not suffer a claw back of any of the VAT he has recovered. To count as a partly completed building you must do more than dig and concrete foundations. Nonetheless, while what you sell must be above foundation level, it does not need to be above ground level.
Can Pete use the deposit on exchange to fund the works needed to create the golden brick?
Normally a deposit paid on exchange is received by the vendor’s solicitor as stakeholder rather than as agent. As a result, there is no tax point until completion. But if Pete uses part of the deposit between exchange and completion, so changing the character of the deposit, does this create a tax point at a time when Pete appears only capable of making an exempt supply of the existing building rather than of partly completed new dwellings?
HMRC has confirmed this should not be a problem as the VAT treatment of the deposit is determined by the anticipated state of the asset at the time of completion. Therefore, the contract must make it clear that the sale is of the freehold or a long lease in a partly completed building rather than of land or of an existing building.