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VAT incurred by developers in the construction of new properties is recoverable based on a developer’s INTENDED USE of the property.
1. If the intention is to sell, then newly built residential property are zero-rated.
2. If the intention is to lease, then this would be an exempt supply under which VAT incurred cannot be recovered. HMRC consider such developers as investors instead.
3. However if this is only temporarily letting the property until the property market recovers, then the zero-rating of the new build stays. HMRC issued a Brief and an Information Sheet to clarify the VAT position where a house builder decides to let a new house in the short term instead of selling it.
Alternatively one can use Reg 108 adjustment which would be required if the builder abandoned his intention to sell in favour of exempt lettings and this requires a computation of a clawback on a just and reasonable basis.Also note VAT directly attributable to letting is exempt supplies and the input tax is irrecoverable.
Other considerations include transferring the site, or granting a long lease of it, to a group entity. This group entity would then grant assured shorthold tenancies of the completed /houses/flats to tenants. Provided the transfer to the group entity happens after the foundations are above ground level (“Golden Brick” stage) it will qualify for zero-rating and entitle the developer to recover the VAT incurred on site acquisition and most other costs. This type of structuring is commonly used by developer operators in the build-to-rent and student accommodation sectors.
Is this abusive arrangement?
HMRC have been asked about the possibility that house builders might, in advance of any short term lets, make the first grant of a major interest in the completed dwellings to a connected person, who would not be a member of a VAT group with the house builder. This zero-rated sale might remove the need for the kind of adjustments explained in Information Sheet 07/08. The suggestion put to HMRC is that the connected person would then rent out the properties until such a time as they could be sold. The rentals would be exempt and not give rise to input tax deduction on ongoing costs including the costs of the eventual sale (for example estate agency and legal costs). HMRC sees this as NOT abusive.
It is likely that the a developer’s intention to sell a property once the market recovers will remain. If so, only part of the VAT originally recovered by the developer needs to be repaid. It is important to note that such adjustments should be made when the developer’s intention changes, not when the new-build has been let. HM Revenue and Customs have stated that such a change of intention may be evidenced by board minutes resolving to pursue short term letting of properties or an estate agent being instructed to let the property in question.