VAT - building site or not?

Building site or not?

Two important rulings of the Supreme Court have been published on the question of whether there is a building site for VAT purposes. Based on these rulings, it appears that a building site is founded even sooner than before. As a result, a VAT-taxable supply will occur.

Principles for construction site qualification

The result of developments in case law and legislation over the past 10 years is that land will qualify as building site much earlier than before. For VAT purposes, the supply of a building site is subject to VAT. The requirements for qualifying as a building site are simple:

• there must be an undeveloped site
• that is intended for construction

Regardless of the (apparently) simple requirements, in practice it is often a challenge to come to the correct qualification.

Practice and building sites

Carefully planning real estate transactions is very important. This is certainly the case with (building) sites, as the subsequent exploitation of that (building) site and/or buildings determines how the land should be purchased.

If the subsequent exploitation is VAT exempt, the (building) site should preferably be purchased without VAT and with transfer tax. This prevents 21% non-deductible VAT becoming due as the VAT cannot be reclaimed due to the VAT-exempt operation.

If, on the other hand, the subsequent exploitation of the (building) site/building will be subject to VAT, the site will often be purchased with VAT and without transfer tax. In this situation, the VAT can be reclaimed.

The qualification of land as a building site can be manipulated to a certain extent. If the land is to be purchased as a building site, the site must be undeveloped and also intended for construction. The parties can then make agreements that the seller will demolish the old buildings and provide an undeveloped site. Previous case law has made it clear that an undeveloped site can also cover the situation in which a building is still present at the time of supply, but the seller has the obligation to demolish the building. If the parties in such a situation have agreed that the seller will supply an undeveloped site, one actually only looks at what the parties have agreed on and not at the 'physical elements' of the transactions (the building still present upon delivery).

The exact interpretation of seller’s obligation and the allocation of the demolition costs can result in  quite some discussions. Who should bear the costs, can the costs be divided between buyer and seller? What about the risk of demolition operations? The two new rulings of the Supreme Court provide some more insights in these questions. Unfortunately, it will also lead to new discussions given the lack of clarity on some points.

Supreme Court rulings (2)

In both cases, the seller and buyer did not intend to deliver a building site, but rather developed land. The supplies of these sites were therefore VAT exempt. However, this was not successful for various reasons. The Supreme Court decided that both cases involved building sites and therefore subject to 21% VAT.

Demolition costs or not - at the expense and risk of buyer

The first ruling discusses in more detail the question of how to deal with the costs and risks of the (demolition) work carried out by the seller after delivery of the site. It was clear from the parties' documents that the demolition operations would in any case be carried out at the expense and risk of the seller. It had already been established before the court that the parties' aim could be nothing other than the delivery of undeveloped land.

The Supreme Court's ruling makes it clear that a seller does not actually have to incur costs in order to qualify land as an undeveloped site. Bearing the risk or being responsible for those actions is sufficient. In this case, the seller did not have to incur any costs for 'demolition' to obtain undeveloped land. This case included portacabins that were removed free of charge. The costs for the removal of the portacabins were already included in the price for the delivery and installation of the portacabins. In addition, the Supreme Court makes it clear that the buyer may also have demolition work carried out, as long as the costs and the risk of the demolition work are for risk of the seller. This ruling further broadens the scope for qualifying a site as a building site. In practice, this makes it easier for situations in which one actually wants to supply a building site (VAT-taxed), but more challenging if one wants to prevent this (VAT-exempt).

Old buildings demolished, but a 100-meter wall remains standing

The second ruling concerned the question of how to deal with a site on which a building remained standing after demolition. It is clear that in such a situation there is no undeveloped site and therefore there can be no building site. However, based on previous case law, the remaining building can be considered 'negligible', especially if it no longer has a function and/or is very limited in size compared to the entire site. In this case, the Supreme Court examines in more detail the methodology and conditions on the basis of which this test must take place. The legal framework has thus been clarified.

The issue in this case that the Supreme Court had to rule on concerned the situation that the old factory had indeed been demolished prior to delivery, but a wall of almost 100 meters long and 2.5 meters high remained standing. This wall also had an important function in the later development of the new construction project. Such a building is difficult to ignore in terms of size, however, it can also be 'negligible' if the remaining part of the site is (for example) 25 times as large. Unfortunately, there is no such clarity in this case, so in practice it remains a challenging exercise and will therefore continue to cause the necessary discussion.

The other relevant point from this ruling is that once the site has acquired the status as a building site, this status is not easily lost. This is only possible (assuming that the site is still undeveloped) if it can be demonstrated that the land is no longer intended for development.

Following this ruling, we expect more discussions about sites on which a building is still present and therefore in principle does not qualify as a building site. Due to the legal framework as now further explained by the Supreme Court, there appears to be more room to classify these sites as building sites.

If you would like to know more about these statements, or have any other questions about building sites, please do not hesitate to contact us.

If you have any questions about this topic or if you would like to discuss the topic further, please do not hesitate to contact us at info@vatpartners.com