VAT-registered developers of new build properties can recover all the VAT charged at the standard 20% VAT rate, as when the building is eventually sold the sale will be charged to VAT albeit at zero-rate.
In recent years some developers have not been able to sell and have had to let out the property instead. VAT on lettings is exempt, therefore in this situation none of the VAT paid can be reclaimed. This is because the builders are deemed to be operating as investors rather than developers.
If VAT has already been reclaimed, then that amount will need to be repaid to HMRC. However, if the new build business comprises a mixture of sold and rented flats then a Partial Exemption calculation will be required to determine the proportion of VAT reclaimable. Normally these costs will be incurred in a year in which there is no income and as such, under the standard VAT claim method, no VAT is reclaimable.
In this situation HMRC will apply a ‘de minimis’ test using a ten-year economic life in the calculation and thus permit a proportion to be reclaimed, i.e. if the properties are let for one year before being sold, one-tenth of the input VAT would be repaid.
If the ‘de minimis’ calculation is breached, HMRC will suggest a calculation so that some VAT can be claimed. HMRC’s suggestion need not be used and if refused, no VAT can be claimed.
Julian constructed two properties expecting to sell at £250,000 each. The input tax recoverable on the building materials was £60,000. As the properties could not sell it was decided to let instead for a period of three years expecting total rental income from both properties to be £300,000 over the period.
The ‘de minimis’ calculation is:
£60,000 x 30% = £18,000
HMRC suggest a calculation based on estimated sales values and estimated rents as below:
Estimated eventual sale x £60,000
Estimated eventual sale plus estimated rents
i.e. £500,000 x £60,000
£500,000 + £300,000
This would result in £37,500 of recoverable input VAT, recoverable in the first quarter that Julian decides to let the properties.
If the property had been a corporate development the property could be transferred to that company as a zero-rated supply and as such no ‘clawback’ of VAT calculation would be required.
This tip was first printed in Business Tax Insider in December 2016.