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Protecting VAT cash flow on residential developments

During this particularly challenging and somewhat unique marketplace, it’s important for housebuilders and developers to explore all ways of protecting cash flow.  Here our VAT expert Carolyn Van Hecke explains.

The coronavirus outbreak has meant that a number of residential developers of partly, or completed, new residential developments may need to consider what the best option is at the current time to maximise the return on their investment.

There are various VAT issues to consider for a residential developer if it anticipates having to delay the sale of any newly constructed residential property, perhaps suspending, in the short to medium term, any residential development that has been started but not completed, or to complete the development and let the newly completed new residential properties in the short to medium term, with a view to their sale at a later date.

During the last recession, in 2008 a concession was introduced which meant that builders could temporarily rent out new dwellings without a loss of input tax. These rules saved the day for many builders and they are still in place today.

In brief the concession works like this:

  • A completed dwelling is given a 10-year VAT life – so an intention to rent out for two years and then sell means that 20% of the input tax claimed on previous returns is relevant to an exempt supply and 80% is linked to the eventual zero-rated sale.
  • The 20% exempt input tax that needs to be adjusted under the payback and clawback rules will still be claimable in many cases by using the partial exemption de minimis rules – see VAT Notice 706 section 11.

VAT planning

It is essential that housebuilders are aware of the VAT consequences of letting their new builds, but 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 a 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.

VAT on property is generally a complicated area, our team are experts in the housebuilding arena and can provide you with the advice and guidance you need.

 

Please contact our VAT specialist Carolyn Van Hecke who can assist and put a plan in place for you: Carolyn.VanHecke@cowgills.co.uk

 

Disclaimer

The information was correct at time of publishing but may now be out of date.

Coronavirus
Posted by Carolyn Van Hecke
27th May, 2020
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