Property developers: can you claim VAT? Whenever I’m contacted by a property developer, one of the first questions they ask is, almost without exception, “can I claim my VAT back”.
As most of you know already, there is no simple answer to this question, as it depends on a number of factors. It depends primarily on the VAT property rules (which determine the VAT liability of income from property) and partly about the VAT recovery rules (which determine how much VAT you can claim back). And because residential property can generate either zero-rated or exempt income, or a mix of both, there are a lot of issues to take into account.
But the main principle is that it depends on what you’re planning to do with the finished property, so for VAT purposes you need to look at things sort of in reverse – i.e. the end product not the initial costs.
The best way I’ve come up with to explain it is:
Claiming VAT on your costs depends on 2 main factors: first, the type of property you’re creating and second; what you intend to do with it when it finishes; i.e. whether you intend to sell or lease the property and the length of any lease.
This doesn’t tell us the answer, but it tells us which VAT rules we need to consider to work out the answer.
And it’s working out how your development fits around the VAT rules that takes the time and expertise.
The main principle is that if your supplies of/income from the property, (sale, lease, licence etc) will be zero-rated, then you can claim VAT on costs, subject to the normal exclusions. If your supplies/income will be exempt, then in principle you can’t normally recover VAT.
What if you generate both exempt and taxable income from property?
If you’re making both taxable and exempt supplies, you can claim the VAT on costs used to generate taxable income, but not the VAT on costs used to generate exempt income unless it falls below certain “de minimis” limits. You have to follow a set of rules (the partial exemption rules) to work out how much VAT you can recover.
It can also depend on the timing of your expenditure and income from sales or leases of the property.
The calculations are made using the VAT partial exemption recovery rules, which are normally done on a twelve month basis. So if all your income and expenditure is in one “VAT year” (12 months ending March, April or May depending on your VAT return periods), and your income is all zero-rated or exempt, the calculation can be relatively straightforward.
It gets complicated when you have a number of different properties, each with their own VAT profile, requiring individual VAT recovery calculations and especially so if expenditure and income is spread over more than one “VAT year”.
And that’s only part of the story. In some cases, you may have to recalculate how much VAT you’re entitled to claim if your plans change and/or if you change the way the property is used; for example you lease a property for a few years and then sell it..
And finally: you can only recover VAT that is correctly charged
The other important factor is that you can only recover VAT that’s correctly charged. In other words if you’re charged 20% VAT for work that was eligible for the reduced rate of 5%, you can’t claim any of the VAT you’ve paid. You’d have to ask the contractor to cancel the original invoice and issue a revised invoice. This means that you not only have to become an expert on VAT on sales and leases of property, but you also have to understand the rules that determine when the 5% or zero-rate applies to construction work.
Property developers: can you claim VAT and where do you start?
Well there is no right or wrong way to do this. My approach is to develop a “VAT profile” for each property which starts at the very start of the budgeting process and carries on right through to completion. It starts by establishing what you’re planning/hoping to do with the property and then following the VAT rules to work out the VAT liability of the supplies/income, how much VAT you’ll be paying on the construction work and then how much VAT you can claim.
I’ve never been a property developer but I’ve learned, over the years, just how many different issues developers have to sort out; from planning permission, to finance, to contractors’ issues, environmental issues etc – and that’s all before you even start to do any of the construction work or start generating any income. So I understand that VAT is just one of many complex issues and it’s not easy.
The best advice I can give you is to start by incorporating VAT into your financial planning/budgeting right from the beginning to make sure you’ve enough funds to deal with VAT right from the start and to help manage the VAT process right through the life of the development
Marie
October, 2014