Property Development Accounting: WIP and Profit Timing

Introduction

Most development files come to us with the same first question: “What’s the WIP figure at 31 March?” That’s the wrong place to start. It is also why development accounts so often need reworking after the tax computation has been drafted.

Before anyone totals a WIP schedule, someone has to decide what the property actually is. The same site can be held as trading stock or as an investment property. Each gives a different balance sheet, a different tax charge on the profit and a different VAT position. For companies buying dwellings, SDLT and ATED differ as well. If that decision is right, the rest of the file is arithmetic. If it’s wrong, every number after it lands in the wrong place.

We’ve worked on a lot of development files for UK practices over the years, and the difficult ones tend to look the same. A company buys a site, gets planning permission and builds eight units. It sells five and lets three while the market is slow, and nobody records what the plan for those three is. Two years later, whether they are stock or investment has become a question about tax on several hundred thousand pounds.

This isn’t a textbook tour of FRS 102 Section 13. It’s the order in which our team works through a development file for a 31 March year-end. We start with classification, then build the WIP schedule, then deal with profit and VAT. At the end are the questions practices and developers ask us most often.

Why the first question isn’t the WIP figure

Timing makes this autumn busier than usual. Accounts for 31 March 2026 year-ends are being prepared now, and private companies must file them by 31 December 2026. These are the last accounts prepared under the old revenue rules. The revised FRS 102 applies to periods beginning on or after 1 January 2026, so companies with a 31 March year-end will first apply it to the year ending 31 March 2027. The previous Section 23 used a risks-and-rewards model for sales and a stage-of-completion model for construction contracts. The new version replaces both with a single five-step model.

Three things make this year’s files harder than usual:

• Revenue rules are changing. Contracts signed now will be accounted for under the new Section 23 next year, so profit timing needs a fresh look.
• A new levy on residential schemes. From 1 October 2026, a new Building Safety Levy applies to residential developments in England. It adds a further cost to schemes that are still being appraised.
• Development sits across two sectors. A developer is a construction business whose product is property. Its accounts need construction-style cost control and property-style tax analysis in the same file.

Trading stock or investment property

The classification decides almost everything that follows. We work through three questions.

What was the intention when the site was acquired? A site bought to develop and sell is trading stock. A site bought to hold for rent or long-term growth is an investment. The evidence matters as much as the owner’s recollection. Useful evidence includes board minutes, the development appraisal, the type of bank facility, marketing material and the planning application.

Even where a property is labelled as an investment, the transactions in UK land rules can tax the profit as income. That applies where the land was acquired, or developed, mainly to make a profit on disposal.

Has the intention changed, or only the timescale? Letting unsold units while the market recovers doesn’t change their classification by itself. Practitioners on AccountingWEB make the point that if the plan is still to sell, the property stays in stock until it is sold or a decision is made to keep it for its investment return. Letting while waiting for a buyer is a change of timescale. Deciding to keep units for their rental income is a change of intention.

What happens when the intention changes? A change in either direction is treated as a disposal at market value, but the two directions work differently:

• Investment to stock. When a company moves property from investment to trading stock, section 161 TCGA 1992 treats it as sold and bought back at market value. That can crystallise a gain before any development profit exists. An election under section 161(3) holds the gain over into the value of the stock, but it must be made within two years of the end of the accounting period. Since 8 March 2017 the election has only been available for gains, not losses.
• Stock to investment. Moving property out of trading stock requires market value to be credited to the trading accounts, and there is no equivalent election. The company is taxed on a trading profit it hasn’t received in cash.

In the accounts, the transfer is made in the year the intention changes. As one AccountingWEB contributor noted, it isn’t a prior year adjustment, because the earlier treatment was correct at the time. What HMRC enquiries in this area most often lack is contemporaneous evidence. A short board minute recording when and why the decision was taken is invaluable if the position is later challenged.

How the classification changes the outcome

This is how the same property is treated on each side of the line:

Area	Trading stock (developer)	Investment property (investor)
Balance sheet	Current asset, at the lower of cost and estimated selling price less costs to complete and sell	Investment property at fair value, with gains and losses in the profit and loss account
Tax on profit	Trading profit: corporation tax, or income tax and Class 4 NIC for individuals	Chargeable gain: corporation tax for companies, CGT for individuals
Value movements	Write-downs to net realisable value are deductible; no uplifts	Fair value movements aren’t taxed until sale; deferred tax is recognised instead
Finance costs	Can be capitalised into WIP and relieved as stock is sold	Loan relationship rules for companies; basic rate credit for individual residential landlords
VAT	First sale of a new dwelling is zero-rated; input VAT is recoverable	Residential letting is exempt; input VAT is usually blocked
SDLT and ATED (company, dwelling over £500k)	Developer relief from the 17% rate and from ATED, if claimed	Relief for a rental business, otherwise charged
Change of use	Moving to investment: market value trading receipt	Moving to stock: market value disposal; s161(3) election available

On the files we see, most of the tax consequences flow from the first two rows. Investment property revaluations don’t catch people out, because practitioners know they aren’t taxable. The problems come from reclassifications that nobody recorded.

Building the development WIP schedule

Development WIP is inventory. Under FRS 102 Section 13 it is held at the lower of cost and estimated selling price less costs to complete and sell, and that test is applied site by site.

What goes into WIP:

• land at cost, including SDLT, legal fees, surveys and agents’ fees on the purchase;
• planning and professional fees, such as architects, engineers and planning consultants;
• construction costs and site infrastructure, such as roads, drainage and utility connections;
• planning obligations, including Section 106, CIL and the Building Safety Levy;
• site-specific overheads, such as a site manager, construction insurance and security;
• interest, if the company has chosen to capitalise it.

What stays out of WIP: general administration, abnormal wastage and selling costs, such as agents’ fees on sale, advertising and show-home marketing.

A common mistake with small developers is posting the land purchase straight to cost of sales. In one forum case, a £230,000 purchase in cost of sales produced a large loss in one year and would have produced an artificial profit in the next. The replies were clear that all acquisition costs of an unsold property, legal fees included, belong in WIP.

We build one schedule per site, laid out like this:

Column	What it holds
Cost to date	Land, fees, construction, infrastructure, planning obligations and interest, each shown separately
Cost to complete	The quantity surveyor’s latest estimate of the costs still to come
Total expected cost	Cost to date plus cost to complete
Expected sales value (GDV)	Contracted prices for sold plots and current estimates for unsold ones
Released to cost of sales	The cost allocated to plots that have legally completed
Closing WIP	Cost to date less the cost released

Reconcile the schedule to the QS report at every year-end. Then test closing WIP against expected sales value less costs to complete and sell, site by site.

Capitalising interest and fees

FRS 102 Section 25 gives companies a choice of accounting policy. They can capitalise borrowing costs that relate directly to a qualifying asset, or expense all borrowing costs. Development stock that takes a substantial time to complete is a qualifying asset. Whichever policy is chosen must be applied consistently across all qualifying assets.

Capitalisation starts when both development spending and borrowing costs are being incurred and work is under way. It pauses during long periods when active development stops, such as a site waiting months for a planning appeal. It ends when the units are substantially complete.

Lender arrangement and exit fees form part of the effective interest cost. Interest on a completed unit that is sitting unsold is a holding cost and should be expensed, not added to stock. We regularly see WIP inflated by a year of post-completion interest.

Tax treatment. For property development, where interest is capitalised into trading stock, the tax deduction generally follows the accounts. It is given when the stock is released to cost of sales, not when the interest is paid.

This creates a timing problem for groups within the Corporate Interest Restriction. In the year a development is sold, all the capitalised interest comes through at once, but the interest allowance for that year may not be large enough to absorb it. The interest allowance (alternative calculation) election can fix this mismatch. It only works properly if it is made in the first period in which the group capitalises interest on the loan.

Section 106 and CIL obligations

Planning obligations are part of the cost of a development and go into WIP. The questions are when to recognise them and how to spread them across plots.

Section 106. Section 106 agreements usually require some combination of financial contributions (for education, highways or open space), affordable housing and on-site works. Payments are often triggered by commencement or by the occupation of a set number of units. Recognise the liability when the trigger is met, but include the full expected cost in the site budget from day one. That way, every plot’s margin carries its share. Affordable units sold to a registered provider at a discount are recorded at the contract price. The allocation method in the next section then spreads the resulting lower margin across the site.

CIL. The Community Infrastructure Levy falls due when development commences, and the paperwork matters. If a valid assumption of liability notice or commencement notice isn’t served, the whole levy becomes payable immediately on commencement. Missing the commencement notice can also bring a surcharge of 20% of the chargeable amount, capped at £2,500. Late payment adds a further surcharge of 5% of the amount due, or £200 if that is greater, and it increases the longer the debt is outstanding.

CIL itself is a development cost. Surcharges and late payment interest are penalties, so they are expensed rather than added to WIP.

Building Safety Levy. The new levy applies to building control applications and initial notices submitted on or after 1 October 2026. Here is how it works:

• Who it catches. It generally applies to developments of at least 10 new dwellings or 30 purpose-built student bedspaces.
• How it is calculated. The charge is per square metre of gross internal area, including communal space. Each local authority sets its own rate, so rates vary with local house prices. Sites on qualifying previously developed land pay 50% of the standard rate.
• When it is paid, and by whom. It must be paid before the earlier of first occupation and building control completion. The client named on the building control application is responsible.
• How to account for it. Treat it like CIL: include it in the site budget and allocate it across plots.

For practices, the useful question for each client this month is simple. Which schemes had building control submitted before 1 October, and which didn’t?

Apportioning cost across plots

Some costs belong to a single plot, such as that plot’s own build cost. Others relate to the whole site: land, infrastructure, planning obligations, professional fees and capitalised interest. Site-wide costs need an allocation method.

The most common method is relative sales value, because it gives every plot the same margin percentage. Floor area can work for identical units. An equal share per plot is rarely defensible.

For example, take a 10-plot site with six houses at £400,000 and four flats at £200,000. Gross development value is £3.2 million, and shared site costs are £1.2 million, which is 37.5% of GDV. Each house therefore carries £150,000 of shared cost and each flat £75,000.

The most common error is releasing only the costs incurred so far. Suppose four houses have completed by the year-end, when £900,000 of the £1.2 million shared costs has been spent. Releasing their share of costs to date gives £450,000. The correct figure, based on total expected cost, is £600,000. The difference of £150,000 overstates this year’s profit and pushes losses onto the last plots. The fix is a cost-to-complete accrual for plots already sold.

Re-estimate budgets at every year-end. Changes in estimate are applied from that point forward, not by restating earlier years.

Recognising profit

Speculative sales. For a completed unit sold on the open market, revenue is recognised at legal completion, when title and keys pass. That was the practical result under the old risks-and-rewards model, and it is when the buyer obtains control under the new Section 23.

A sale that has exchanged but not completed at the year-end is normally left in stock, with the deposit held as a liability. Completed units with no buyer don’t generate any profit. As one AccountingWEB contributor put it, recognising profit on unsold houses would be like recognising profit on a warehouse of unsold widgets.

Building for a customer. Contracts to build on the customer’s land, or design-and-build work for a housing association, are recognised over time as the work progresses. Any expected loss on the contract is recognised immediately.

Part exchange. When a developer takes a buyer’s existing home in part payment, that home is non-cash consideration, recorded at fair value. If the part-exchange allowance is higher than the home’s market value, the excess is really a price reduction on the new home and reduces its revenue. The part-exchanged property is then held as stock at the lower of cost and net realisable value.

On SDLT, a house-building company that acquires an individual’s existing home as part of that individual’s purchase of a new home can be exempt. The seller must have lived in the old home as their main residence at some point in the previous two years. The exempt area is generally limited to 0.5 hectares. On VAT, the resale of a part-exchanged home is an exempt supply, so VAT on its refurbishment and selling costs sits in the partial exemption calculation.

Before 31 March 2027. Review sales incentives that will count as variable or non-cash consideration under the new Section 23. Examples include paid legal fees, stamp duty contributions, free upgrades and overage clauses. For tax, companies follow GAAP for profit timing, so any change in accounting timing changes the tax timing too.

VAT recovery on new build

The first sale of a newly built dwelling by the developer, or the first long lease over 21 years, is zero-rated. That means VAT on the related costs is fully recoverable. Later sales of the same property are exempt. Zero-rating requires a qualifying building, a sale or long lease, and the developer’s “person constructing” status.

Builders’ services on new dwellings are zero-rated. Professional fees for architects, surveyors and lawyers are standard-rated but recoverable. Some items are blocked even for zero-rated developers: goods not ordinarily installed by builders, such as white goods, fitted furniture, carpets and curtains.

Conversions. A developer’s first sale of dwellings converted from a non-residential building is also zero-rated. Builders’ conversion work is charged at the 5% reduced rate. As with new build, VAT on professional fees is recoverable in full, because it relates to the zero-rated sale.

Commercial property. A freehold sale of a new commercial building is generally standard-rated for the first three years after completion.

Land with an option to tax. A developer buying land that the seller has opted to tax will be charged VAT. A developer who intends to build dwellings can usually disapply the option with a VAT 1614D certificate, provided it is given before the price is fixed.

Change of intention. This is where VAT connects back to classification. If a developer reclaims input tax expecting to make taxable sales and then makes an exempt supply, such as a residential letting, input tax claimed in the previous six years may have to be repaid. However, HMRC guidance from 2008, which is still in place, allows many builders to let unsold homes temporarily without losing input tax. Where the clawback would be material, one option is to sell the homes to an associated company that isn’t in the same VAT group. That company then carries out the letting.

Putting it into practice

A development file comes together in a set order:

1. Record the classification of each site in a short memo.
2. Build the WIP schedule site by site.
3. Test and settle the interest policy.
4. Recognise planning obligations and levies.
5. Allocate site costs to plots, with cost-to-complete accruals.
6. Check revenue cut-off at 31 March.
7. Review the VAT position against how each unit will actually be sold or let.

Following that order avoids most of the rework we see.

For practices, this work outsources well. The WIP schedule, cost allocation and VAT analysis follow a documented method, exceptions are flagged for a decision, and the partner reviews the final position. You can see how we support property clients on our Real Estate & Property page. Our Construction page covers the contractor side of the same schemes. Our year-end accounts outsourcing service shows how development files arrive ready for review before the 31 December filing deadline.

Frequently Asked Questions

Classification and structure

What is property development accounting?

It is the accounting for land and buildings that are developed to be sold. Costs build up as work in progress while the scheme is under way. They are released to cost of sales plot by plot as units legally complete, and profit is recognised on each sale. It differs from property investment accounting, where buildings are held at fair value and earn rent.

Is development property a current asset or a fixed asset?

Property held for sale in the ordinary course of business is inventory, which is a current asset. That covers land held for development and units under construction or completed but unsold. Property held for rental income or capital growth is an investment property. It is shown at fair value outside current assets.

How do I decide whether a property is trading stock or an investment?

Look at the intention when the property was acquired and at the evidence supporting it. That means board minutes, the appraisal, the type of finance, marketing activity and planning applications. Short-term lettings don’t change a trading intention. Record any change of intention in a board minute, dated when the decision was made.

What happens if a developer lets unsold units?

If the plan is still to sell, the units stay in stock. Letting them while waiting for a buyer is a change of timescale, not of intention. The rent is income of the trade. For VAT, the lettings are exempt supplies. HMRC’s 2008 guidance on temporary lets often protects the input tax already recovered, but check it before the lettings start.

What if the company decides to keep some units as rentals?

That is a change of intention. The units move from stock to investment property in the year of the decision. For tax, the move is treated as a sale at market value, so a trading profit arises without any cash coming in. There is no election to defer it. Model the tax cost before the decision is made, not afterwards.

What are the transactions in UK land rules?

They are anti-avoidance rules, in ITA 2007 Part 9A for individuals and CTA 2010 Part 8ZB for companies. They can tax a gain on UK land as trading income where the land was acquired or developed mainly to make a profit on disposal. This applies even when the property is described as an investment. They matter most for “develop and hold briefly” schemes.

Do individual developers pay income tax or CGT?

Income tax, if they are trading. A development trade is taxed as trading income, with Class 4 National Insurance on top. CGT applies to investment disposals. An individual developer’s finance costs are a normal trading deduction. They aren’t subject to the residential finance cost restriction that applies to landlords.

Should each development sit in its own company?

Many developers use a separate special purpose vehicle (SPV) for each site. It ring-fences risk, suits lenders and makes joint ventures easier to set up. The tax and VAT effects of grouping need thought, including group relief, VAT grouping and Residential Property Developer Tax allowances. Structure the scheme before the land is bought; changing it later can trigger SDLT and other charges.

WIP and costs

What costs can be included in development WIP?

Include the land and its acquisition costs, planning and professional fees, construction, infrastructure, planning obligations and site-specific overheads. Include interest too if your policy is to capitalise it. Leave out general administration and selling costs. Keep the schedule site by site, so that the net realisable value test and plot allocation can be done properly.

Are marketing, show home and sales agent costs part of WIP?

No. Selling costs are expensed as they are incurred. The show home plot itself stays in stock until it is sold. Its furniture, marketing suite fit-out and brochures are selling costs, or fixed assets if they will be reused on other sites.

How is WIP valued at the year end?

At the lower of cost and estimated selling price less costs to complete and sell, tested site by site. Use the quantity surveyor’s cost-to-complete report, together with current agent valuations or contracted prices. If market conditions recover, a previous write-down is reversed, up to the original cost.

What if the development is worth less than it cost?

Write the stock down to net realisable value in that year. For a trading developer, the write-down is deductible for tax because it follows GAAP. Document the valuation evidence, as HMRC will ask for it if the write-down creates or increases a loss.

Can abortive costs be claimed if planning is refused?

If the site is abandoned, the planning and professional costs are written off to profit and loss, and a trading developer can deduct them. If the site is kept for another scheme, test it against net realisable value instead. A company that hadn’t started trading when the costs were incurred may be able to claim them under the pre-trading expenditure rules, which cover the seven years before trade starts.

Can a developer claim capital allowances?

Not on the stock itself. Capital allowances are available on plant and equipment used in the trade, such as site equipment, vans and reusable site cabins. A developer that keeps commercial buildings as investments may have separate claims on those buildings.

Interest and finance

Can you capitalise interest on a property development?

Yes, if the company adopts that policy under FRS 102 Section 25. The policy must then be applied to all qualifying assets. Capitalise interest that relates directly to the development while active work is under way. Pause during long delays and stop at practical completion.

When is capitalised interest tax deductible?

For trading stock, generally when the stock is released to cost of sales, because the tax treatment follows the accounts. Relief comes plot by plot as sales complete, not as interest is paid. Interest incurred before a company starts trading can be treated as a trading debit, provided an election is made within two years of the end of the period in which it arose.

Does the Corporate Interest Restriction affect developers?

Only groups with net interest over £2 million a year are caught, but capitalised interest can create a timing mismatch for them. All of the interest may hit the year of sale, when that year’s allowance can’t absorb it. The alternative calculation election can solve this, but only if it is made in the first period in which the group capitalises interest.

Are individual developers caught by the landlord interest restriction?

No. The residential finance cost restriction applies to property rental businesses, not trades. A sole trader or partnership developing homes to sell deducts interest as a normal trading expense. If that trader lets units, the interest on the let units falls into the property business and is restricted.

Planning obligations and levies

Is Section 106 an allowable cost, and when is it recognised?

Yes. For a developer it is part of the cost of the development, and therefore part of stock. Recognise the liability when its trigger is met, such as commencement or a set number of occupations. Include the whole expected cost in the site budget from the start, so that every plot’s margin carries its share.

How is CIL accounted for, and what if the commencement notice was missed?

CIL is a development cost that is due on commencement, and it goes into WIP. If assumption of liability or a valid commencement notice was missed, the full amount is payable immediately on commencement. A surcharge of up to 20%, capped at £2,500, may also apply. Surcharges and interest are penalties. They are expensed and are not added to WIP.

What is the Building Safety Levy and who pays it?

It is a new levy on residential building work in England, raising money to fix historic building safety defects. It is expected to raise around £3.4 billion over roughly ten years. It applies to building control submissions made from 1 October 2026 on major residential schemes, and it is charged per square metre at local rates. Affordable housing is exempt. The named client on the building control application pays it.

What is Residential Property Developer Tax?

It is an additional corporation tax charge on large residential developers. Groups with residential development profits over the £25 million annual allowance pay an extra four percentage points. That means those profits are taxed at 29% rather than 25%. Most SME developers fall below the allowance. Check groups with several SPVs, because the allowance is shared across the group.

Profit recognition

When should a developer recognise profit on a sale?

On legal completion, when title passes to the buyer, for units sold on the open market. Cost of sales at that point is the plot’s share of total expected site costs, including costs not yet incurred. Work done for a customer on the customer’s own land is recognised as the work progresses.

Can profit be recognised on exchange of contracts?

Normally not. At exchange, the buyer has neither title nor possession, so the sale isn’t recognised until completion. The deposit is a liability until then. If an exchanged sale completes shortly after the year-end, disclose it as a post balance sheet event where material.

How are part exchange properties accounted for?

The part-exchanged home is non-cash consideration, recorded at fair value. Any allowance above market value reduces the revenue on the new home. The old home then sits in stock at the lower of cost and net realisable value. Where the conditions are met, a house-building company doesn’t pay SDLT on acquiring it. Resale costs are expensed, and VAT on refurbishing it relates to an exempt supply.

How do the FRS 102 changes affect developers with 31 March year-ends?

The revised Section 23 first applies to the year ending 31 March 2027. For plain plot sales, timing rarely changes. The areas to review are incentives such as paid fees and upgrades, part exchange, overage and deferred consideration, and contracts to build for a customer. Tax follows the accounts, so any change in revenue timing flows through to corporation tax.

What is a cost-to-complete accrual?

It is the charge for costs that a sold plot will still bear but that haven’t been incurred yet, such as final roads, landscaping or remaining Section 106 works. Without it, plots that sell early show inflated margins and the last plots show losses. Base it on the quantity surveyor’s latest estimate of total site cost.

VAT and SDLT

Can developers reclaim VAT on a new build?

Yes, if their first supply is a zero-rated sale or long lease of a new dwelling. VAT on professional fees, and on any standard-rated costs, is then recoverable. Some items are blocked, such as white goods, fitted furniture and carpets. Builders should zero-rate their own construction services on qualifying new dwellings.

Should a developer register for VAT if all sales are zero-rated?

Usually, yes. Zero-rated sales are taxable supplies, so registration allows the developer to recover input VAT on fees and other standard-rated costs. A developer can register before any sales are made, as an intending trader. Registration is voluntary where zero-rated sales are below the threshold, but it is normally worthwhile.

What VAT applies to converting commercial property into flats?

Builders’ conversion work is charged at 5%, and the developer’s first sale of each converted flat is zero-rated. VAT on fees and other costs is therefore recoverable. If the property has an option to tax, check the disapplication rules before the property is bought.

What happens to VAT if unsold homes are rented out?

The lettings are exempt, so input tax linked to them isn’t recoverable. VAT already reclaimed may have to be repaid if the intention changes. HMRC’s 2008 guidance on developers’ temporary lets often prevents a loss where the plan is still to sell. Selling the units to an associated company outside the VAT group is another option.

What SDLT does a developer pay on land?

Bare land without dwellings is normally charged at non-residential rates. A company buying existing dwellings pays the higher residential rates, including the 5% surcharge. On dwellings over £500,000, it can also face the 17% rate. Relief from the 17% rate is available where the property is bought exclusively for development and resale in a property development trade. That relief can be clawed back if its conditions are broken within three years.

Do developers pay ATED?

A company holding a dwelling worth over £500,000 is within ATED, even while it is being developed. Relief is available where the dwelling is held exclusively for development and resale in a property development trade. It has to be claimed on a relief declaration return, due by 30 April each year.

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Sources and further reading

• PwC Viewpoint: FRS 102 revised, impact on revenue (Section 23)
• Crowe: FRS 102 changes and first-time application dates
• HMRC Capital Gains Manual, CG47970: appropriations to trading stock
• HMRC Corporate Finance Manual, CFM33130: capitalised amounts
• GOV.UK: Buildings and construction (VAT Notice 708)
• HMRC VAT Construction Manual, VCONST02900
• GOV.UK: Community Infrastructure Levy guidance
• Pendle Borough Council: Building Safety Levy (England)
• BDO: CIR lessons for property development trades

This article is general guidance on UK accounting and tax rules for property development as at September 2026. It is not advice on any individual’s circumstances.