Reclaiming VAT on Land Development Costs: A Guide for Property Developers

For land and property developers, minimising irrecoverable costs spent on land development is likely a high priority, and VAT can be seen as an unwanted consideration in their budget. However, in some circumstances, developers will be able to reclaim VAT paid for their land development expenses—the determining factor in this regard is the VAT liability of onward supplies to be made in relation to the development. This guide explains how to claim VAT on land and property development costs and what VAT can be reclaimed on.

What costs can VAT be reclaimed on?

The key factor to consider in this matter is the VAT liability of the onward supply, as input tax (that is, VAT incurred on purchases) can only be recovered when relating to the provision of onward taxable supplies. Therefore, where costs incurred relate to the letting of residential property or the provision of certain commercial properties that are not opted to tax, these will be irrecoverable.

HMRC does not permit businesses to recover input tax that has been incorrectly charged.

Qualifying construction/conversion services and the supply of ‘building materials’ alongside these services can be treated as zero-rated or reduced-rated, respectively, subject to certain conditions. Developers will need to consider the application of these VAT rates prior to undertaking a project as this can minimise the amount of irrecoverable input tax incurred (where taxable supplies are not being made) further to this, HMRC does not permit businesses to recover input tax that has been incorrectly charged, and as such, if VAT is charged at the standard rate on qualifying construction services, this VAT cannot be recovered as input tax, and this will need to be sought from the supplier.

How to reclaim VAT on land and property development?

Reclaiming input VAT on land and property development depends on the nature of the project and whether the business is making taxable or exempt supplies. The process of recovering input VAT, where allowable, involves:

• Determining VAT treatment: VAT treatment varies depending on the nature of the supply being made upon completion of the work. Where this is taxable, the business may be obligated to seek VAT registration, depending on whether taxable turnover will exceed the VAT registration threshold (although VAT registration can still be sought on a voluntary basis)
• Registering for VAT: if the business is not already VAT-registered but is liable to do so, this must be actioned in accordance with HRC guidance – this also facilitates the recovery of input VAT.
• Maintaining VAT records: detailed records of invoices and receipts for VAT-incurred expenses must be kept. These should align with the VAT rules applicable to land and property transactions.
• Submitting a VAT return: the VAT incurred on eligible costs is reclaimed through the business’s VAT return. Input VAT must be correctly recorded, ensuring that only VAT relating to taxable supplies is reclaimed.
• Adjusting for partial exemption: where development involves both taxable and exempt supplies, a partial exemption calculation may be required to determine the proportion of VAT that can be reclaimed.
• Considering the option to tax: if the development involves commercial property, opting to tax the land or building allows VAT recovery on related costs but means VAT must be charged on subsequent sales or rentals.

Maximising your VAT recovery costs

By implementing certain actions, businesses can optimise their VAT cost recovery. These steps include:

• Keeping detailed records: maintain accurate invoices and receipts for all VAT-incurred expenses to support VAT returns.
• Understanding VAT treatment: Based on the type of development, identify which costs qualify for full, partial, or no VAT recovery.
• Using the option to tax: opting to tax commercial property can allow VAT recovery on related expenses, though this should align with the wider business strategy.
• Applying partial exemption rules: where projects involve both taxable and exempt supplies, a partial exemption calculation may be required to determine the recoverable VAT.
• Reviewing VAT position regularly: assessing VAT liabilities throughout the project can help manage cash flow and avoid missed recovery opportunities.

What help can you get for reclaiming VAT from your land development costs?

Reclaiming VAT on land development costs can be complex, particularly for projects involving mixed-use properties, exempt supplies, or partial exemption calculations. Several sources of professional help are available to ensure compliance with HMRC rules and improve VAT recovery.

VAT specialists and tax advisers

VAT specialists provide tailored advice on which costs qualify for recovery and how to structure transactions to maximise VAT reclaims. They can assist with:

• Assessing eligibility: reviewing development costs to determine which expenses are recoverable and advising on partial exemption calculations where applicable.
• Opting to tax: evaluating whether opting to tax a property is beneficial and guiding businesses through the application process.
• Record-keeping and compliance: ensuring proper documentation is maintained to support VAT claims, reducing the risk of HMRC challenges.
• Cash flow and VAT return management: helping to time VAT reclaims effectively to improve cash flow and prevent delays in reclaiming funds.
• Managing VAT on joint ventures and phased developments: advising on VAT implications for projects involving multiple stakeholders or staged construction.

HMRC guidance and helplines

HMRC provides online guidance, VAT notices, and helplines to assist businesses with VAT recovery. Developers can use these resources to check eligibility rules, understand VAT treatment for different costs, and clarify record-keeping requirements. However, as HMRC does not provide tailored advice, businesses often seek professional guidance to address specific VAT issues.

For land developers looking to minimise their costs, optimising their VAT recovery on applicable expenditure can increase their cash flow and available budget for other uses.