VAT Alert for Residential Developers 
Added : 5th September 2008
"The VAT and other tax implications need to be carefully considered before any transactions are entered into," says Steve Taylor.
With the current decline and uncertainty in the housing market many developers will be considering letting out their newly built properties which they currently cannot sell.
Steve Taylor, VAT Senior Manager at Regional Business Advisers, Cooper Parry says “Although VAT cannot be charged on either a sale or letting of residential properties there is nevertheless a difference between a freehold sale and granting a short term lease that will have implications for VAT recovery.”
The right to recover VAT is determined by two basic principles. First of all the expenditure has to be for the purposes of the VAT registered business. Secondly the expenditure has to relate to taxable supplies made or to be made by the business.
For house builders this latter condition is satisfied when newly constructed houses and flats are disposed of by way of a freehold sale or the grant of a lease for a period in excess of 12 years.
Both are referred to as the grant of a major interest and are zero rated (a taxable supply).
However granting a lease for a period of 21 years or less is an exempt supply and this is where a problem with VAT recovery can occur.
Steve continues “Where the first supply of a house or flat is the grant of a short term lease the developer is required to review the VAT that has already been reclaimed in respect of the construction of the residential building e.g. building materials, legal and professional fees, VAT on conversion costs etc and repay all or a proportion of that VAT to reflect the VAT exempt supplies that have been made.”
This so called clawback rule can apply for a period of up to 6 years after the VAT is first incurred.
Where the developer subsequently grants a major interest in the property that is still a zero rated supply.
Steve says “There are a number of possible solutions to this problem which will minimise the VAT loss when properties are rented out for a short term.This can involve negotiating with HMRC regarding the method to be used to calculate any VAT loss or moving the properties that are to be let out to another company or entity.”
Steve advises “In all cases the VAT and other tax implications need to be carefully considered before any transactions are entered into.”
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