Constable VAT Consultancy LLP

HMRC have today issued a Revenue and Customs Brief that considers when a zero-rated sale undertaken by a house builder might be viewed as unacceptable VAT avoidance. 

Many house builders are finding that they are unable to sell newly built dwellings in the current economic climate and are instead choosing to rent those properties in the short term. This has VAT implications because rather than making a zero-rated sale the house builder receives VAT exempt rental income, which can remove VAT recovery rights in relation to costs previously incurred.  

To avoid this problem, some house builders have considered selling dwellings to a connected company, thus crystallising a zero-rated sale. Any exempt supplies are then made by the new owner, thus minimising any VAT recovery restriction for the original builder. HMRC have been asked whether they will challenge such arrangements as avoidance (on the basis that VAT recovery rights cannot be obtained by sales which have no commercial purpose and are undertaken with the sole aim of obtaining a VAT benefit). 

HMRC states in the new Brief that they do not consider that such a transaction would be unacceptable VAT avoidance in most cases but go on to point out circumstances in which a sale with the sole aim of preventing VAT costs would be considered abusive.