Good news for housebuilders
Developers beware of VAT issues when letting out new-builds
In the last Autumn Statement, the Government again confirmed its commitment to increase the supply of new homes available to buy or to let.
VAT incurred by housebuilders in the construction of new properties is recoverable based on a housebuilders’ intended use of the property. When the newly built property is sold or a long lease of over 21 years is granted, it is classed as a zero-rated supply. This allows a housebuilder to recover the VAT incurred in the development prior to any sale or long lease being granted.
Housebuilders choosing to let their newly built properties are, for VAT purposes, making an exempt supply, under which VAT incurred in the construction, cannot be recovered. Consequently some of the VAT recovered when the housebuilder intended to sell the property must be repaid. If the housebuilder had no fixed intention to sell or to rent the properties out, the input tax on the abortive costs would be treated as residual expenditure.
If a housebuilder is both selling and renting newly built houses then the business will be partially exempt.
A housebuilder can be partially exempt if it receives taxable income as well as exempt income. For example, a housebuilder selling zero-rated new houses for £800,000 and also receiving rental income (exempt) of £200,000 – in this instance, the VAT on the overheads will be restricted by 20% and this portion will not be recoverable.
However, as per HM Revenue & Customs, a business can be treated fully taxable if the total exempt input tax (directly related to exempt income plus exempt proportion of the overheads VAT) is under the de-minimis limit.
A business can be de-minimis if the total exempt input tax is not more than £625 per month on average and is half the total input tax in the relevant period.
The total value of exempt input tax is that which is directly attributable to exempt supplies plus the proportion of any residual input tax that is attributable to exempt supplies.
Most housebuilders are de-minimis for VAT purposes as sub-contractors zero-rate their supplies. The de-minimis limit can only be crossed if the housebuilder buys their own machinery, equipment etc.
It is therefore in the interests of housebuilders to be aware of the VAT consequences of letting their new builds;especially during a downturn in the property market when many have to choose between letting their newly built properties or allow them to remain empty whilst looking for buyers.
Good planning at the right time can help housebuilders recover all the concerned VAT or apply the VAT restrictions as per HM Revenue & Customs guidelines.
Housebuilders can fully recover VAT on their costs (e.g. machinery, materials, and architects fees) building houses for letting by setting up another company.
A housebuilder can make a zero-rated supply of the houses to the newly setup company (newco) in advance of any lettings. It allows the housebuilder to recover VAT on all the above mentioned construction costs.
The newco will then receive the exempt income from the residential lettings. As VAT on all the main construction costs should have been recovered by the housebuilder, the newco could potentially be left with a small VAT amount which will be irrecoverable.
The above planning is acceptable – HMRC Brief 101/09.
VAT on property is generally a complicated area of VAT law and one where mistakes can be costly. HMRC guidance contained in notices 742 (Land & property) and 708 (Buildings and Construction) is becoming increasingly lengthy as legislation changes and case law interpretation shifts the boundaries. The generic answers to any property queries should not be relied on for specific planned transactions and professional advice should always be sought in advance of undertaking a specific project.
For any VAT queries please contact our VAT team at firstname.lastname@example.org – 01904 464 100 or fill in our contact form below: