Land Development Projects: What are the VAT Considerations?

Farmers and rural landowners are increasingly seeking ways to diversify their income streams, whether that be via setting up solar farms or converting barns into holiday lets. Many have also taken the step of offering or selling their land for housing development.

At Monahans, we are currently experiencing a rise in the number of clients going down the route of selling land for development. This is likely due to a combination of factors: often opportunities to sell land come about in the process of succession planning, many of the historic option agreements entered into 20 years ago are now coming to fruition, and there is a renewed interest from developers in approaching landowners to make an agreement over their land.

Historically, many landowners will have granted options to developers, giving them the opportunity to secure planning permission and first refusal should the land become available for development.

However, in recent years we have seen a shift towards promotion agreements. In these scenarios, a third party enters into the negotiations to obtain the planning permission and, at the end of that process, the land will go to the open market for sale.

Promoters are paid for the cost of doing this and receive a percentage of the uplifting value or percentage of the value they generate.

So where does VAT factor in?
Many landowners and farmers are focused on the capital gains and tax arrangements around land development; meaning the potential VAT implications of an agreement can often be overlooked.

The way that VAT works in any walk of life is that individuals can reclaim VAT if the sale they are performing is taxable in itself.

However the sale of land is usually exempt from tax, which means that the seller can't claim VAT back on any related costs, such as legal fees, which can represent a substantial cost to the seller. This becomes even more problematic where the landowner has used a promoter, whose fee (based on a proportion of the sale value) is also subject to VAT.

What is the solution?
A common solution, especially if selling to a house builder, is to exercise an ‘option to tax,’ where HMRC is informed that the land is no longer exempt. This means that when the land is sold, it will have VAT on it, which can ordinarily be reclaimed by the developer.

The one financial downside of this scenario for a developer, is that stamp duty is payable on the VAT inclusive purchase price, which will be a higher rate. So, for example if you were selling a piece of land for a million pounds, stamp duty would be based on £1.2 million rather than £1 million.

However, this still represents a relatively minor figure compared with the reclaimable VAT, which can be a substantial figure. For example, we have had clients who have received an extra £150K of proceeds from a deal, with no detriment to themselves, simply due to different VAT treatment.

At Monahans, we work with clients to arrange deals in a number of ways, depending on their individual circumstances, in order to ensure that VAT does not become an unnecessary addition to the cost base.

What should clients do?
VAT is a transaction-based tax, so the options are severely limited once the sale has taken place. The advice is therefore to always seek advice in plenty of time, there are many options that we can discuss to reduce this tax burden.

The closer to a sale taking place, the narrower the range of options available so it’s crucial to seek advice from the outset, even if you are only at the stage of considering a land agreement, to give yourself the best chance of a positive financial outcome. We always recommend thinking ahead as much as possible, when it comes to financial decision-making.

Why Monahans?
Because the options for land development have broadened, the process has become more complex and, at times, increasingly challenging. It is therefore crucial to seek advice from an accountancy firm who can advise on the best way forward whilst taking into account all of the moving parts, such as potential VAT implications.

At Monahans, we are lucky to have a team with a unique combination of land-specific experience and in-depth VAT knowledge, which gives them a comprehensive understanding of the nuances involved with selling land for development, or for any other purpose. As a result, we are well placed to guide our clients in navigating the sometimes-complicated system and are passionate about achieving the best possible outcome for them.

If you need support with your rural business or landed estate, or would like VAT guidance get in touch with the team today, we would love to hear from you.

Andrew Perrott