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When a supply of property is liable to VAT the charge extends to the whole of the property, including the site. No difficulty should arise in this regard when a purchaser is dealing with a single vendor. A difficulty could arise when a purchaser acquires his interest in the site from one person and has contracted with another person to carry out the building work on the site.

To meet this situation Section 4(5) of the VAT Act 1972 provides that a landowner who does not himself engage in any development work can, nevertheless, be treated as a taxable person in certain circumstances. The most common example of the application of this provision relates to the granting of building licences. Under such an arrangement, a landowner, in consideration of the payment of a site fine by a builder, on the site and undertakes to convey an interest in the site to the builder's nominee (i.e. the house purchaser).

In those circumstances, the landowner is regarded as a taxable person and is accountable for VAT, firstly, on the site fine, and secondly, on the value of any interest conveyed to the purchaser.

In addition, if a house purchaser bought an undeveloped site from a company and then entered into an agreement with a related company to build a house on that site, the original section 4(5) ensured that VAT was payable on the disposal of the site.

Between 1972 and 1994, Section 4(5) of the VAT Act operated successfully to combat tax avoidance schemes of this nature. However, in an Appeal hearing in 1994, the subsection was found to be defective. Section 122 of the Finance Act 1995 revised the wording of section 4(5) to take account of this Appeal decision. It ensures that the sale of a site, as part of an overall agreement to develop it, continues to be taxable. This is in line with long-standing Revenue practice in this area. The new wording of section 4(5) is simply intended to maintain the status quo obtaining between 1972 and 1994.

The sale of an undeveloped site is not affected by this provision and will continue to be free from VAT unless disposed of in the precise circumstances outlined above. Thus, the new provision will not apply, for example, where a parent makes a gift of a site to a child, nor, generally, even where a parent sells a site to a child. Nor will the new provision apply where the parties to a gift are unrelated.