VAT Public Clarification VATP018 clarifies the VAT treatment of the sale of a building and the subsequent supply thereof by the purchaser and is relevant to any business involved in buying and selling property.
The updated Real Estate VAT guide includes a number of important revisions which are relevant for property developers, construction firms, and any other employers that provide residential accommodation to their employees.
VATP018 on change in the permitted use of a building
VAT Public Clarification VATP018 addresses the VAT implications of situations where a building is sold to be used in a certain way (i.e. residential or non-residential), and subsequent to the date of supply, the purchaser changes the permitted use of the building.
VATP018 clarifies that a change in permitted use will not change the VAT treatment of the preceding sale, but will change the VAT treatment of any subsequent sale of the building by the purchaser per the new permitted use.
As an example, such a scenario would take place where a building is sold as a serviced/hotel apartment (a non-residential building for VAT purposes), and subsequently the purchaser changes the permitted use to residential use only and sells the building on to a third party.
In this scenario, the purchase of the building for use as a serviced hotel apartment would have been subject to VAT at the standard rate of 5% (assuming it was not the first sale of the building within three years of completion, in which case the sale would have been zero rated).
The change in permitted use after the date of supply to a residential building would mean that the building will thereafter be subject to the VAT treatment of a residential building. If the purchaser then sells the now-residential building on to a third party, it would be an exempt supply. The VAT treatment of the preceding sale, however, will not be impacted.
Likewise in the opposite scenario, a building sold as a residential building will be exempt from VAT (assuming it was not the first sale of the building within three years of completion, in which case the sale would have been zero rated). If, after the date of supply, the purchaser changes the permitted use to a non-residential use, i.e. a serviced hotel apartment, and then sells the building on to a third party, the sale will be subject to VAT at the standard rate of 5% as a non-residential building.
The key updates in the Real Estate VAT guide relate to the following:
Supply of employee accommodation
Bare land
Owners’ Associations and Management Entities
Other updates
There are several other updates, including the VAT recovery on repair and maintenance costs for mixed use buildings (how to apportion the VAT), the payment of VAT on the sale of commercial real estate (buyer may pay the VAT via a bank nominated by the FTA) and VAT refunds for new residences (all applications to be submitted on the FTA portal).
We recommend that businesses in the Real Estate sector or engaged in related transactions familiarize themselves with the new Public Clarification and updated guidance published by the FTA.
In particular:
Where existing agreements are in conflict with the updated guidance, there should be communication between suppliers and customers to agree on a way forward and potentially amend existing contracts in order to bring them in line with the guidance.
Businesses may also benefit from seeking clarification from the FTA in order to determine how the updated guidance and Public Clarification applies to their
circumstances.
Note that while the Public Clarification and guide set out the FTA’s position on the matters discussed, they do not amend the existing legislation, which takes precedence over any supplemental guidance.