VAT on property is generally a very complicated area of VAT law and one where mistakes can be very costly. HMRC guidance contained in notices 741 (Land) and 708 (Buildings and Construction) is becoming increasingly lengthy as legislation changes and case law interpretation shifts the boundaries. The generic answers below to the hypothetical questions posed should not be relied on for any specific transaction contemplated and professional advice should always be sought in advance of undertaking a specific project.
SCENARIO 1: SMALL BUILD DEVELOPMENT X 2 SEMI-DETACHED HOUSES BUILT FOR RENT
Question 1. For VAT purposes, should project be carried out as a company?
Answer: For VAT registration purposes businesses are considered on an entity by entity basis (subject to some anti-avoidance disaggregation rules outside the scope of this article). When a sole trader registers for VAT then all his business activities will potentially be subject to VAT under that registration. For example a landlord sole trader who carries out window cleaning on part time basis would expose his window cleaning activities to Standard Rate VAT if he were to register. A limited company or Partnership registration will however only apply to business activities undertaken by that specific entity. As to whether a potential landlord will want to set up a limited company and register for VAT is probably more dependent on other tax issues including whether it is beneficial from an income tax and corporation tax perspective. The VAT issues in respect of the specific project outlined in this scenario are likely to be broadly similar whether performed as a sole trader or Limited Company.
Question 2. Can a Landlord recover VAT as an individual?
Answer: An individual Landlord can only register for VAT if they are making or intend to make TAXABLE supplies. A landlord only receiving residential letting income will be making EXEMPT supplies and therefore would be unable to register. If a Landlord carried on other taxable business activities e.g. letting management services or sale of new build residential properties then registration would be feasible and some recovery of input vat could be achieved under the Partial Exemption de-minimis scheme (see HMRC website Partial Exemption 4050).
Question 3. Can small developers use the DIY self-build VAT recovery scheme or register another way?
Answer: The self-build DIY scheme only applies to individuals constructing a residence for themselves or relations to occupy and not for intended sale, letting or other activity. Small scale developers can only register if they are making or intend to make taxable supplies (either zero, standard or lower rate). This would be applicable for building new residential property for sale but not for let. If registration conditions can be met then returns can be made monthly, quarterly or annually and it is likely that cash flow will be best suited to monthly returns.
Question 4. Is VAT payable or recoverable on labour and materials?
Answer: Most residential developers, building to let, will be unable to register and recover input VAT. It is important therefore to reduce any VAT payable in the first place to a minimum. If using contractors to carry out the build work, who are VAT registered, then such work should be capable of being ZERO rated as construction work on a new residential dwelling. Significant input Vat should not therefore be incurred in the first place. Unregistered contractors will not charge VAT but their costs may be higher in regard to VAT on materials which they themselves are not recovering. Certain contract costs such as architects fees and surveyors cannot be included under zero rating (together with certain fitting out costs such as white goods) and this VAT will be an additional irrecoverable vat cost. Individual one off purchases of materials direct from trade suppliers e.g. bricks, cement etc. cannot be zero rated by the builders merchant and VAT will be incurred if bought direct. It may actually be better from VAT perspective if a VAT registered building contractor buys the materials (which they can recover the VAT on) and they then supply the whole package of labour and materials as a ZERO rate supply of construction services to the developer/landlord.
Question 5. Can adjustments to VAT be made subsequently?
Answer: If a developer initially intends to build a residential property for sale and recovers full input tax on that basis then provided the sale does actually occur at the end of the build there will be no claw back of any VAT recovered through the build. However if the sale should not occur for whatever reason and the house is let either temporarily or long term then a claw back of all or partial previously claimed input VAT may be triggered. Recovery of any late previously unclaimed VAT is permissible within the three year retrospective timescale allowable by HMRC.
SCENARIO 2 – REFURBISHMENT OF EMPTY PROPERTY
Question 6. Is VAT payable on a refurbishment project?
Answer: It is likely that one of two types of residential refurbishment will be undertaken, either:
(i) A refurbishment of an existing residential building; or
(ii) A refurbishment of a non-residential building with conversion to residential use
Under (i) if the building has been occupied in the last 2 years as residential occupation then the refurbishment supplies will always be STANDARD rated ( as is the case for normal house extensions, repair and maintenance work on occupied residences ). However if the building has been empty and unoccupied for over 2 years then the contractor carrying out the refurbishment work may charge VAT at the LOWER rate of 5%. Under (ii) provided the building in question has not been used or designed as living accommodation in the last 10 years then again the contractor may charge VAT at the lower 5% rate.
SCENARIO 3 – FLAT DEVELOPMENT
Question 7. What are VAT implications of a development project of say 8 flats?
Answer: This scenario to some extent follows on from scenario 2 if the development /refurbishment involves changing the existing number of residential units (e.g. converting a single house to 8 flats). In this type of scenario, again the contractor undertaking the work can charge the lower rate of 5%. The ability to recover the VAT charged either at the lower or standard rate will depend on the normal principles outlined above of matching the input vat to a ZERO or STANDARD rated onward supply. As noted above residential property letting will always be an exempt supply (which cannot be altered by election unlike commercial property) and a landlord would need other zero or standard rated business activity to recover under partial exemption de minimis rules. If the project is a complete new build then full VAT recovery will apply if the flats are sold but if any are to be let on completion of the project then claw back rules can apply and specific advice should be sought.
As you will now be aware, property is a complex area of VAT, therefore if you require any additional advice from our experts please do not hesitate to get in touch.