This blog is all about accountants, VAT and property advice. But before I start, I should say that I don’t really know how to write this blog without offending some accountants. So I’m going to apologise in advance to any of you who think I’m being unfair. And before I go on, I should also say that most accountants I deal with work very hard to provide good services to their clients and can’t be expected to know details about complex areas of VAT.
The problem is that some accountants don’t know when to ask for help.
It’s this sort of issue:
We’re going to convert an old pub into a couple of houses for rental. Can we claim any of the VAT on our costs?
Over the past month, I’ve spoken with three separate property developers who have converted commercial property to create new or additional dwellings for residential lettings. In each case, the developers have taken advice from their accountants who told them that they couldn’t claim any VAT on the costs because the properties were investment properties for short term lets.
In principle, the answer to the questions is correct if you convert to residential and lease the properties on short term residential lets. The income is exempt so you can’t claim VAT on related costs. So the advice was technically correct.
In two of the cases, the plan was to sell the freehold of the converted properties to related businesses to keep the development and investment sides of the operation separate. So how does this affect things? Well, in certain circumstances, the sale of converted residential properties can be zero-rated, which means that the developer is entitled to claim VAT on related costs.
Of course it’s possible the case that the accountants concerned didn’t realise that the developers intended to sell the freehold. It’s also possible that they weren’t aware that the zero-rate could apply in these situations.
Either way, the developers didn’t register for VAT at the time and missed out on claiming VAT on the costs at the time, but they have also failed to notify a liability to register for VAT.
Unfortunately this type of scenario isn’t uncommon. And it highlights the real issue.
When it comes to VAT and property, the answer should always start with the words: “it depends…”. In the case of my three property developers, the answer wasn’t a simple “yes or no”. To give the right answer, you have to ask for a lot more information.
The problem isn’t that the accountants gave incorrect advice. The problem is that the accountants didn’t understand the broader subject which would have enabled them to ask for more information and hopefully give more appropriate advice.
And that’s the problem when it comes to VAT and property.
Many accountants simply don’t realise how much they don’t know about the subject.
It’s the difference between giving a yes or no answer to a question on the one hand and having the knowledge and experience to give a client proper advice on the other hand.
I think that accountants have a lot to do and it’s a bit unrealistic for them to have detailed knowledge about specialist areas of VAT or any other tax. Accountants have to deal with a whole range of financial and accounting issues for their clients, including filling out VAT returns and dealing with many day to day VAT issues.
I often think that it’s a bit like the difference between a GP and a consultant. You go to your GP to deal with most of your everyday health issues, but you wouldn’t expect your GP to cure you of cancer. He/she would refer you to a consultant. I work with many accountants as a consultant to provide that additional level of expertise when necessary. I couldn’t do an accountant’s job and I don’t expect accountants to be able to advise on complex VAT issues.
Of course, VAT is only one aspect of any business and doing a simple conversion for rent may be the best option when it comes to tax, stamp duty land tax, accounting etc. But it’s important for a client to know the different options that are available so the client can make the final decision about how to proceed and how to arrange their affairs to save VAT and keep your VAT costs to a minimum. If you’re the client and you’re developing or investing in property, it’s your money and you need proper advice.
The real cost for accountants?
So what’s going to happen if your client doesn’t register for VAT OR claim VAT on related costs or incur additional VAT on costs because of your advice? In my experience, it could be either of the following:
• you’ve got an unhappy client who and may refuse to pay their bill; or
• the client fires you and doesn’t pay their bill; or
• the client fires you, doesn’t pay the bill and decides to take legal action.
Either way, it’s a load of hassle and could cost you a lot in terms of time and money.
Red moon
I was awake about 3am last Monday morning and looked out to see the red moon, created by the moon’s eclipse. It was a tiny little moon, but I could clearly see the eclipse and the red colour. It was awesome. Just awesome. And the third “first” for me in terms of seeing things in the sky this year – in July, I saw Venus and Jupiter and in August, I saw the Perseid meteor shower.
Makes me realise just how small we are in this incredible universe.
Marie
September 2015