Could you kindly guide me on the treatment of the following developments costs incurred by a property developer before the houses are sold to individuals such as:

Direct costs of materials
Own labour
Sub-contract builders
Carpets and white goods
Surveyor costs
Architect fees
Site overheads

Due to market conditions the developer has decided to let some of the properties through a subsidiary for 3 years before the eventual sale. What is the vat implications or SDLT.
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First grant of major interest in land/properties which are dwellings is Zero Rated (ZR). The input costs incurred is fully recovered except on white goods. Some of the items you listed are ZR by suppliers and others like materials on their own, professional fees, white goods etc are Standard Rated (SR).

A change of use is subject to a claw-back adjustment. In cases of Briararch and Curtis Henderson, the clawback is split between the lease period say (3 years) and the subsquent taxable sale. HRMC tends assume house life span is 10 years and hence input VAT is split 3:7, and 3/10 of the input tax is clawed back.

To avoid this clawback, the developer can consider a sale of the houses to a group company which will be ZR. The new company cannot be part of the VAT group since supplies between vat group members are outside scope of VAT and could therefore not be ZR. The sale of properties to a group company would attract SDLT unless group relief is claimed.

The company can lease the properties and rentals are exempt and related input VAT not recovered. No SDLT is payable on short term leases. This is not considered abusive following the principles of Halifax case (ie are the result the intended by VAT legislation = yes as dwelling are ZR).
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