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VAT – Option to Tax

Q: My client is a residential property developer building, and then selling, regular houses. They have recently found some development land for £350,000 + VAT as the vendor says they have opted to tax. Can my client disapply the vendor’s OTT, and if not, does my client need to OTT in order to claim back the VAT?

A: Your client will not be able to disapply the vendor’s option on the basis of using the purchase for new dwellings; this is only possible when buying a building for conversion to dwellings, or bare land bought by a DIY housebuilder or relevant housing association. Your client will, however, be able to recover the VAT on the purchase on the basis they intend to use the land to make (zero-rated) taxable supplies (of the first grant of a major interest in a new dwelling). There is no need for your client to opt the land in order to recover the VAT on the purchase as long as this intention remains. If however within 6 years of purchase, and before the zero-rated sale is made, the client changes their intention and decides to use the land for exempt or non-business purposes (e.g. sell the bare land unopted, or build the dwellings and rent them on short lets) they would have to revisit the VAT initially recovered on the purchase under the 6 year payback/clawback rules.