Construction and property development may be rewarding but they can bring a particular set of VAT and tax headaches. Establishing best practice and avoiding mistakes are extremely important in this sector as transactions can involve substantial sums of money. If you are active in this area you need an advisor who can help guide you through the pitfalls. In our Focus on Property we highlight some of the common VAT and tax problems that our clients encounter.
Although most developers are aware that new homes are zero-rated for VAT, VAT can’t be reclaimed on everything. There are specific rules, particularly around professional fees, fitted furniture, white goods, carpets and landscaping. Zero-rating of works also extends to sub-contractors works. Tax tip: Check the VAT Notice 708 on buildings and construction and ensure the VAT claim is correct, as reclaims can be thrown out by HMRC if the incorrect rate is used. Complications occur if, having built a home, it can’t be sold and it is let it out instead. Residential letting is not a VAT-able activity so some of the input VAT reclaimed on the build will have to be paid back. Broadly the calculation is; expected rents divided by expected rents plus the ultimate selling price, although there may be ways around this. Tax tip: Contact us to find out the implications of renting a newly built property instead of selling it.
VAT can also be reclaimed on works to convert non-residential property such as offices, pubs and barns to residential property. Contractors and sub-contractors working on the property can usually apply the reduced rate of 5% VAT. Tax tip: To gain the maximum VAT reclaim if converting a mixed-use site to residential, take care in the plans not to taint a new residential dwelling with any part of the old residential dwelling, otherwise input VAT cannot be reclaimed on that dwelling.
Ordinarily no VAT can be reclaimed on residential refurbishments, but works renovating a residential property that has been empty for 10 years or more can be zero-rated, or 5% rated where the property has been empty for more than 2 years. Tax tip: Don’t overlook these rules and miss out on reclaiming the VAT.
Options to tax
An option to tax (OTT) is when an owner has elected that a commercial property will be subject to VAT, often because it means input tax can be reclaimed on purchase or renovation costs. It also means VAT is applied to rents. Tax tip: Ensure you opt to tax if you buy a property with VAT on it, or have a substantial renovation to undertake, and charge VAT on any rental income. Tax tip: When selling an opted property, contact us immediately if you are served with a notice to disapply an option to tax, as accepting it could have serious VAT implications.