VAT - New zero-rated dwellings – whether arrangements are abusive

In the current housing market, house builders might, in advance of any short term lettings, make the first grant of a major interest in the completed dwellings to a connected person, who would not be a member of a VAT group with the house builder. This zero-rated sale would remove the need for adjustments to VAT on expenditure.

The connected person would then rent out the properties on Assured Shorthold Tenancies until such a time as they could be sold. The rentals would be exempt and not give rise to input tax deduction on ongoing costs. The deduction of the VAT associated with the original construction would have been secured.

HM Revenue & Customs says that this arrangement will not be considered abusive. However, if the VAT deducted goes beyond the VAT that would normally be deducted in relation to the supply of the new dwelling (for example VAT on costs such as repairs, maintenance or refurbishment, which is not normally deductible) such arrangements are likely to be challenged as abusive.