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Comment from a Contact - Helen Carey, Constable VAT Consultancy LLP

July 2016 - Issue 83

VAT concerns with Property Development

When a property development is undertaken there are three main areas of concern in relation to VAT:

  1. What VAT rate should be applied to the construction work?
  2. Can VAT on expenditure be recovered?
  3. Will VAT be due on the income that the development generates?

The VAT rates that can be charged on construction services are summarised below:

It is important to establish the correct rate of VAT chargeable early in a project. HMRC will not repay VAT that has been incorrectly charged by the supplier.  Therefore, if a reduced or zero-rate is available in respect of construction services this should be applied even if you expect to be able to reclaim VAT.

Having established that the correct VAT rate is being applied to construction work it is then necessary to consider VAT recovery and the treatment of income. These points are related because VAT on expenditure is reclaimable from HMRC when a VAT registered business makes or intends to make “taxable supplies”.  “Taxable supplies” in essence mean sales on which VAT is chargeable at 0%, 5% or 20% as opposed to “exempt supplies”. 

Where new dwellings are concerned there are two common VAT treatments in respect of sales:

Only in scenario A could VAT suffered on expenditure be recovered as it is only in that scenario that taxable supplies are made.

Where new commercial property is concerned there are 3 common VAT treatments for sales:

Only in scenarios A and C can VAT on construction costs be recovered.

The expression “option to tax” refers to the right to elect to make a property subject to VAT, which can be beneficial from a VAT recovery perspective. It is a property specific election that each person with an interest in land may make if he wishes to reclaim VAT on expenditure. It does not transfer with ownership i.e. if A, who has opted, sells the building to B then B must separately make and notify any option to tax he wishes to make.

The rules in relation to VAT and construction are complex. We have summarised important points to consider. However, professional advice is usually required to ensure the correct VAT rates are applied and to maximise VAT recovery in relation to expenditure. It is also important to note that:

The key point to note is that unless you are very experienced in dealing with VAT on land and property transactions significant risks can arise and it is sensible to take professional advice.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, views or policy of Prettys LLP.

Helen Carey, Partner

Constable VAT Consultancy LLP

T: 01206 890796
helen.carey@ukvatadvice.com

 

 

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