VAT on supply of mixed use developments
In our previous articles, we have learnt about the VAT treatment of supply of residential buildings and commercial buildings. There can be practical scenarios where a building or plot of land is used for different purposes, i.e. a portion is used for residential use and another portion is used for commercial use. These kinds of properties are called mixed use developments. In this article, let us learn about VAT on supply of mixed use developments.
What is a mixed use development?
A mixed use development is a building or plot of land which has clear and distinct areas which are put to different uses, which would have a different VAT treatment when supplied.
For example: A building which has retail units on the ground floor, office space on the middle floors and residential units on the top floor is a mixed use development.
VAT on Supply of mixed use developments
When a distinct part of a mixed use development is supplied, the VAT liability on the supply depends on the use that particular part of the building is being put to.
If the portion supplied is being used for commercial purposes, the supply will be taxable at 5% VAT, whereas if the portion is being used for residential purpose, it needs to be checked whether the supply is the first supply or a subsequent supply. If it is the first supply of the property within 3 years from its date of completion, the supply will be zero rated. If the supply is a subsequent supply, the supply will be exempt from VAT.
When a mixed use development is sold in its entirety, the consideration received for the supply needs to be apportioned between the different parts of the building supplied. The value of the consideration relating to the residential part of the building will be treated as exempt from VAT (or zero rated, when the supply is the first supply) and the value of the consideration relating to the commercial part of the building will be liable for VAT @ 5%.
For example: Noor Properties, a registered dealer in Dubai, supplies a building to an unregistered dealer, Shaan Spaces, for a consideration of AED 5,00,000. The ground floor of the building is used for commercial purposes, consisting of 2 shops. The first floor of the building is being used for residential purposes, consisting of 2 houses. The property is being supplied for the first time, 6 years after its completion date.
Here, the consideration of AED 5,00,000 received by Noor Properties is for a mixed use development, portions of which are being used for commercial and residential purposes. Hence, Noor Properties has to arrive at the proportion of the consideration being used for commercial and residential purposes. Noor Properties arrives at the proportion of the consideration used for residential purpose, which is AED 2,00,000 and the proportion of the consideration used for commercial purpose, which is AED 3,00,000.
On the proportion of the consideration used for commercial use, i.e. AED 3,00,000, Noor Properties has to pay VAT @ 5%, which is AED 15,000.
The proportion of the consideration used for residential use is AED 2,00,000. Though it is the first supply of the property, it is after 6 years of its completion. Hence, this portion of the consideration will be exempt from tax.
To learn more about VAT on supply of residential property, you can read our article 'VAT on supply of residential buildings'.
To learn more about VAT on supply of commercial property, you can read our article 'VAT on supply of commercial buildings'.
Hence, VAT on supply of mixed use developments depends upon the use that the portion being supplied is being put to. Based on whether the portion is for commercial use or residential use, VAT on the supply will be applicable.