Recovery, property developers and planning agreements

By Jas Dhillon, VAT Senior Manager
020 7490 7766

A recent Bulgarian case could limit the ability of property developers to recover VAT incurred on costs relating to works undertaken as part of a planning agreement -  often referred to as section 106 or section 75 agreements.  

The Advocate General (AG) for the ECJ has recently issued an opinion in relation to the VAT recovery on certain costs incurred by builders, so called ‘works unconnected to the construction of the building’. The case (Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ — Sofia V Iberdrola Inmobiliaria Real Estate Investments) concerned a Bulgarian developer which was building a holiday village and needed to connect the site to the nearby water pump station, which was not fit for purpose.

As part of the planning agreement, the developer agreed to repair and upgrade the water pump station, for the local authority. The developer recovered the VAT on the costs in relation to the work, on the basis the costs related to the overall taxable supply of constructing the holiday village.

The AG has opined that the only party which could receive the supply from the developer is the local authority, as the work was carried out on its facility. As a result the costs could not be treated as an overhead of the developer. The AG continued that it follows that the VAT incurred on the costs was not recoverable as the supply was made free of charge.

If the ECJ agrees with the Advocate General, this could have an impact on planning gain agreements in the UK. HMRC’s current policy on this is clear, in that the VAT incurred on these types of costs by UK developers is recoverable, on the basis the VAT is attributable to supplies of land and buildings on the development, for which the planning permission was given.

The potential for HMRC to change their policy on this should be considered by builders and developers as it could result in real additional costs; in particular, contracts should allow VAT to be added and consideration paid (if applicable) with regards to these types of agreements.

The good news is that local authorities are usually able to recover VAT charged to them on their activities, as a result of their special VAT status, so if there was to be a supply and consideration arrangement put in place, this should not result in an overall VAT cost, as has been the case for Bulgarian developer.

If you would like to discuss the impact of these developments and discuss potential solutions, please do not hesitate to contact our VAT specialist, Jas Dhillon

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