VAT and property development is a very difficult subject, covering everything from the VAT liability of contractors’ services to applying the complicated rules about caculating how much VAT the developer can claim from HMRC.  And even once you think you understand the process, you have to manage the VAT process right through the life of the project and sometimes up to 10 years later, from the initial back of the envelope budetting right through to actually claiming the right amount of VAT on your VAT returns from HMRC.

About 10 years ago, I wrote the definitive guide to the subject for residential property developers and contractors, which is pretty well still up to date now.  It’s based on a specific 3 step process, which is logical in principle, making it easier to apply the VAT rules in practice.  You can purchase the pdf version from our Shop or buy the paper back edition from Amazon.co.uk here https://tinyurl.com/3np3m5y9. 

It’s a bit of a read covering all of those difficult and often tedious VAT rules, so every now and then I like to remind you all of how the main principles with an extract from the books’ Introduction.  I hope this helps, whether or not you buy the book itself.  Enjoy!

VAT for residential property developers and contractors: Introduction

Everybody knows that VAT and property development is a complicated subject.  This short book explains how VAT applies to residential property development and construction and how to calculate the actual VAT cost of your development.  It’s based on the fact that the VAT cost of a property is depends on 3 fundamental issues that form the 3 step process for  dealing with VAT on residential property devlopment.

The “VAT cost” of a development is the difference between the amount of VAT you pay on your costs and the amount of VAT you can claim from HMRC.

It’s based on the following 3 factors:

·         how the finished property will be used and the VAT liability of sales or rental income;

·         how much VAT you pay on your expenditure; and

·         how much VAT you can claim back from HMRC.

It might seem odd that the first thing you need to know is how the finished property will be used.  But it’s important for 2 reasons:

  • the type of propertythat you create determines how much VAT you pay on the construction work; and
  • the VAT liabilityof income from the property determines how much VAT you can claim from HMRC.

So you have to consider all aspects to calculate the VAT cost.  And as you work your way through the book, you’ll see how the 3 key factors are related for VAT purposes.

To begin with, you need to know how VAT works and how it applies to residential property development.  Read on over to see how the 3 step process works in practice.

Basic principles of VAT

  • VAT is a tax on the sale (“supply”) of goods and services, such as the freeholdsale of new houses (goods) or rent from short term residential lettings (services).
  • Supplies are either taxable or exempt.
  • Taxable sales include sales at the standard rate: 20%, the reduced rate: 5% or the zero rate: 0%.
  • Exempt sales are free from VAT.
  • Businesses can claimVAT on goods and services used to make taxable
  • Businesses can’t normally claimVAT on goods and services used to make exempt sales (“exempt input tax”).

VAT and property developers

Suppose you’re a property developer and you build new houses for sale and refurbish existing homes to rent on normal residential leases.

VAT liability of income

  • Freehold sales of new dwellings are usually is zero-rated.
  • Income from residentiallets is exempt.

VAT liability of contractor‘s services

  • Construction of new dwellings: normally zero-rated which applies to the construction services and goods and materials (“building materials”) that are supplied and installed by the contractor. The term “building materials” applies with certain limited exceptions such as electrical appliances, most fitted furniture, carpets.  See VAT Notice 708, sections 9 – 11 for a full list.
  • Renovations of existing dwellings that have been empty for 2 years or more: reduced rated.

How much VAT can the developer claim?

  • Sales of new homes: VAT on costsrelating to the zero-rated sales of the new homes, such as professional fees, agents fees, hire of goods and building materials.
  • Residential lets: the developercan’t claim VAT “exempt input tax” on related costs, e.g. renovations, legal fees, agents’ fees.

Of course, these are just the main principles and in practice things will depend on the specific circumstances.  For example, you can claim “exempt input tax” if it falls within certain “de minimis” limits.  But if you follow the 3 step approach, it will help you work out the VAT cost and manage the VAT process from the start to the end of the development.

The rules about VAT and property are among the most difficult and there are a lot of them.

They can be just as complex for a single property conversion as a larger housing development. Understanding VAT terminology is essential.  Everyday words can mean different things.  For example, there are at least 3 separate definitions of “dwelling” for VAT purposes and the little 3 letter word “use” can mean different things depending on the context.

Every VAT relief is subject to certain specific requirements which are defined in the law.  Seemingly minor issues can make the difference between paying no VAT at all, or at 5% or 20%.

Finally, remember that you can only ever claim VAT which has been correctly charged.   This puts an added burden on property developers because you have to understand the VAT liability of construction services to make sure that your contractors don’t charge too much VAT.

DIY property developers – developing property for your personal use

If you’re building a new home or converting a property into a dwelling for personal or family use, then you need my book “VAT for DIY residential property developers”.

Getting advice and information from HMRC

The VAT rules about property or construction related issues are contained in a number of HMRC’s VAT Notices, which are listed in Appendix One and you’ll see several links to them throughout this book.  The most important one is VAT Notice 708, Buildings and Construction: http://tinyurl.com/ez77v. You should use the Notices in conjunction with this book to cover all the relevant information.

Property development can be risky at the best of times, but the information this book will help you to keep your VAT costs to a minimum and help you to avoid the hassle and frustration of dealing with VAT.  Just one of many important contributing factors for a successful and profitable development.

Marie

 

 

 

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