Our client is a UK based company that has been set up to buy a plot of land, build a number of commercial premises on the land. All funding for the development project is to come from a ‘loan’ made by an investment company based in the British Virgin Islands. On completion of the project the development company will sell the land and new commercial properties to the BVI investment company, the sale value being over and above the value of the ‘loan’ from the BVI company and the BVI company paying the development company the balance due.
Can the UK based company register for VAT, and claim the VAT incurred on the development? Also, as the sale will be to an investment company based in BVI will the sale be outside the scope of UK VAT?
The sale of the new commercial property to the BVI investment company is standard-rated so, as the UK development company will be making a taxable supply, it can register for VAT and can claim input tax in regard to the development, subject to the usual rules.
The issue is in regard to the ‘loan’ being provided to the company by the BVI investment company.
The ‘loan’ is given specifically to fund the cost of developing the site and will then be off-set against the eventual price of purchasing the site on completion.
Therefore, whilst all parties involved may term it as a ‘loan’ it is in fact a prepayment toward the eventual purchase of the site, thus creating a tax point. As the eventual sale of the site will be standard-rated, VAT will have to be declared on receipt of this pre-payment.
Tony Pocock – Vantage Fee Protect Tax Consultant
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