The VAT landscape for property transactions continues to evolve, with recent HMRC guidance and tribunal decisions highlighting the importance of getting the VAT treatment right from the outset. For property developers, investors and owners, seemingly minor VAT errors can lead to substantial tax costs, denied reliefs and lengthy disputes with HMRC.
In this VAT update, we cover:
- VAT deregistration and opted properties – HMRC’s new process for reporting properties subject to an option to tax when cancelling a VAT registration.
- Disapplication of the option to tax – a tribunal decision demonstrating how the anti-avoidance rules can prevent VAT recovery on development projects involving connected parties.
- Property VAT reliefs under scrutiny – the latest position following the Court of Appeal decision in Colchester Institute Corporation and the potential implications for valuable property-related VAT reliefs.
- The risks of incorrect zero-rating – a case showing how mistakes in applying construction VAT reliefs can lead to significant assessments, even many years later.
- DIY housebuilder VAT claims – a reminder that VAT incorrectly charged by suppliers cannot be reclaimed through the DIY Housebuilders Scheme.
These cases and HMRC updates provide valuable insight into areas that continue to generate challenge and uncertainty. Understanding the lessons arising from them can help developers and investors protect VAT recovery, preserve access to reliefs and avoid costly disputes with HMRC.
De-registration and the option to tax
The option to tax provisions allows a person to tax certain supplies of land that would otherwise be exempt. The purpose of the option to tax is to enable VAT recovery on related expenditure that would otherwise be lost.
If a taxable person has opted to tax land or buildings, a VAT liability may arise at the time of deregistration depending on the circumstances. Assessing the position presents difficulties for taxpayers and HMRC.
To help in the process, HMRC has introduced a new link to enable taxpayers to provide details of opted properties when cancelling their VAT registration online. This replaces the questionnaires which HMRC used to send to applicants where options to tax were known to assist. This should result in a more effective process.
Disapplication of the option to tax
The First-tier Tribunal has dismissed the taxpayer’s appeal in the case of Nissi N Nissi Limited (“NNN”). NNN developed a property to be used by an associated company, Smart Start Nursery Ltd (“SSN”), as a children’s nursery.
NNN opted to tax the property and recovered VAT incurred on the construction. HMRC held that the anti-avoidance rules meant that the option to tax was dis-applied, and the input tax was therefore not recoverable.
The First-tier Tribunal held that SNN had been a development financier because money had been transferred between the companies’ bank accounts to pay for the development works. As SNN was using the building for exempt purposes, the anti-avoidance rules meant the option was disapplied.
The anti-avoidance rules are complicated, and the case serves as a warning to obtain advice on expensive building projects.
Case Study: Property VAT reliefs under scrutiny – reliefs at risk
HMRC has lost its appeal to the Court of Appeal in the case of Colchester Institute Corporation (“CIC”). The appeal concerned the status of the government grant funding that CIC received in support of its further education courses.
HMRC historically took the view that monies received by institutions, such as CIC, from government funding agencies was outside the scope of VAT with the funding supporting non-business activities.
CIC had successfully argued at the Upper Tribunal in 2020 that the funding was consideration for exempt supplies. The Court of Appeal concluded that the funding was paid in consideration for CIC delivering approved courses to eligible students, and this was consistent with the Upper Tribunal decision.
In Revenue & Customs Brief 8 (2021) issued after the Upper Tribunal decision, HMRC gave affected institutions the option of either: –
- applying the third-party consideration position successfully argued by CIC
- continuing to treat the activity as a non-business one consistent with HMRC’s firmly held view
Following the recent Court of Appeal decision, HMRC issued Revenue & Customs Brief 3 (2026) setting out its position. In this latest Brief, HMRC confirmed that there would be no appeal against the Court of Appeal’s decision. It would now consider the terms of the judgment in consultation with relevant stakeholders. Any policy change will be announced by way of another Revenue & Customs accompanied by updated guidance.
In the meantime, Revenue & Customs Brief 3 (2026) has confirmed that affected institutions that have treated the funding as non-business income could continue to do so for the time being. Any change to the VAT treatment of this funding will only apply prospectively from a future date yet to be announced. Further, those institutions can continue to use appropriate reliefs, which include valuable ones as far as property related transactions are concerned, until the date of any change and HMRC will not revisit these after the date of any change.
Those institutions applying exemption should also continue to do so but should not continue to take advantage of any reliefs appropriate to their previous non-business stance. HMRC will take appropriate action in this respect. This could prove very costly where VAT relief has been claimed on historic property related transactions where the properties are now used for business purposes. The ability to claim relief against future developments also disappears for institutions taking the ‘business option’.
Case Study: The risks of incorrect zero-rating – no relief
Nellstar Properties Ltd (“Nellstar”) had zero rated supplies relating to the construction of a hotel car park on the grounds that the buildings were to be sold as residential property. However, this had no basis as the work involved the construction of an extension to the existing hotel. This was evidenced by the planning application. Following an investigation, HMRC issued an assessment for the under-declared VAT that went beyond the four-year limitation period for errors. This was because HMRC considered that Nellstar had ‘deliberately’ mis-applied the zero rate thereby enabling the 20-year time limit for dishonest conduct to come into play.
The case proceeded to the First-tier Tribunal with the credibility of Nellstar’s sole director the determining factor in the outcome. It was not a clear-cut case, but the First-tier Tribunal concluded that, on the balance of probabilities, the director knew that what was being built was, at least in the short term, an extension to the hotel. Moreover, the planning permission sought and granted made it clear that the new building was to operate as an extension to the hotel, HMRC only needed to prove their case on the balance of probabilities and were, therefore, successful.
Case study: DIY housebuilder VAT claims – no refund
The DIY housebuilders scheme enables VAT to be recovered on eligible costs relating to the construction of a new dwelling otherwise than by way of business. It does not allow VAT to be recovered that has been charged incorrectly. In Thomas Joseph Dowey (“T J Dowey”), the First-tier Tribunal agreed with HMRC that T J Dowey had no entitlement to recover VAT incorrectly charged on the supply of a bespoke kitchen. The contractor should have zero rated the supply.
HMRC refused to pay the incorrectly charged VAT as it was not T J Dowey’s input tax. Because it was overpaid output tax, T J Dowey appealed to the First-tier Tribunal with a claim for the overpaid output tax. This was rejected by the First-tier Tribunal on the basis that only the supplier can claim such overpaid VAT from HMRC.
Do you need advice on a property VAT issue?
VAT can have a significant impact on the profitability of a property transaction or development project, and as these cases demonstrate, the rules are rarely straightforward.
Whether you are considering opting to tax a property, planning a development, reviewing VAT recovery, or dealing with a challenge from HMRC, obtaining advice at an early stage can help avoid costly mistakes and provide certainty.
Our VAT specialists work closely with property developers, investors, landowners and businesses across the sector, helping them navigate complex VAT rules and identify practical solutions.
If you would like to discuss any of the topics covered in this update, or have a property VAT question of your own, please get in touch. We’re always happy to listen, talk through your circumstances and help you find the right way forward.
