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Is the sale of residential property by a developer subject to VAT at the zero rate?

26 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Can a transaction be zero-rated for VAT purposes if a VAT vendor buys residential property from a property developer who is also a VAT vendor? 

A property developer who is a registered VAT vendor enters into an agreement with the buyer (also a VAT registered vendor and not a developer or property company as such) to sell a residential property to the buyer. There is a lease agreement in place between then tenant and the seller at the moment. The buyer is willing to continue with the lease agreement with the tenant.

A: There is no zero rate that applies to the supply of fixed property and particularly the supply of residential property.  From the facts we also don’t believe that this is a supply of a going concern and that the rate of zero per cent provided for in section 11(1)(e) can apply.  

You state that "there is a lease agreement in place between then tenant and the seller at the moment”, but the requirement is that it must be a supply of an income-earning activity.  The current practice prevailing – see interpretation note 57 – is as follows:

"An agreement to sell a fixed property to the sole tenant does not constitute the disposal of a going concern, as the income-earning activity (being the leasing activity) is not sold to the purchaser. The purchaser obtains a capital asset without the capacity to continue the leasing activity.”  

You are correct that the supply of a dwelling under an agreement for the letting and hiring thereof will be an exempt supply.  That would mean that the developer was not carrying on an enterprise.  It would be another reason why it is not the supply of going concern.  

If our understanding of the facts is wrong this guidance may not be appropriate and you must then provide us with more detail to enable us to provide the guidance.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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