Purchase and construction agreements and VAT

An old supermarket is redeveloped into homes for sale, with separate purchase and construction agreements. Are the land and the building work treated as a single supply or not?

The situation

An existing supermarket, more than twenty years old, is being redeveloped into homes for sale. Separate purchase and construction agreements are concluded with the buyers. The sale is a joint effort:

• Project BV sells part of the existing supermarket to the buyer under a purchase agreement
• Bouw BV concludes a construction agreement with the buyer for completing the home

Project BV has undertaken no obligation whatsoever to demolish the existing supermarket. Bouw BV will demolish it and deliver the new homes. Project BV and Bouw BV do not form a VAT group: they are independent parties.

The question

What are the VAT consequences of Project BV selling the existing supermarket and Bouw BV building the homes?

The answer

In 2013 the Dutch Supreme Court held that under a purchase and construction agreement, the contractor's transfer of the land and construction of an apartment must be regarded together as a single supply: the taxable supply of immovable property on completion, subject to 21% VAT. Where the land supply and the construction are carried out by the same taxable person, including a VAT group, there is no longer any split between a supply of land subject only to transfer tax and the completion of new construction subject to VAT.

Where the land is supplied by a third party and the construction is carried out by one or more contractors, the land can still be supplied within the transfer tax system, provided of course that it is not building land for VAT purposes.

Project BV has undertaken no obligation here to demolish the existing building. It transfers only an existing building and does not take on the conversion work. The whole conversion is carried out by Bouw BV, on the buyers' instructions. Project BV therefore makes a VAT-exempt supply of an old property with its site.

The conversion work that Bouw BV carries out for the private buyer under the construction agreement is subject to 21% VAT, because it involves the completion of a new immovable property.