VAT: Partial Exemption issues for Property Developers – Update – Potential Good News
It is difficult to pick up a newspaper without reading something about the effects of the credit crunch on the housing market. The immediate impact of this for many developers of new homes has been a lack of buyers in the marketplace. Developers looking to rent out empty surplus new homes in the short term, until market conditions for selling improve, should be aware and consider the VAT implications of doing so. Whilst short term rental of empty new homes may be good news for cashflow, it can lead to serious erosion of any VAT already recovered on construction costs, in the worst cases eliminating any entitlement to recover VAT incurred and requiring VAT to be repaid to HM Revenue and Customs (HMRC). The letting of homes is an exempt supply and takes a property developer into a complicated area of VAT known as Partial Exemption. HMRC has just realised an Information Sheet on the implications for property developers. It is essential that property developers consider the implications or renting out newly completed homes before they do so.
To alleviate the implications of Partial Exemption issues for Property Developers there is an option available whereby the Developer could sell the houses / flats to a connected party as long as the connected party was not in the same VAT Group as the Developer. For example, ABC Ltd (a property developer) could sell newly built flats to a connected party XYZ Ltd (a letting agency). This sale would be zero rated and would allow ABC Ltd to reclaim the input VAT on costs incurred in the original construction of the flats. HMRC has confirmed that they would as ‘abusive from a VAT point of view’ in their recently released Revenue & Customs Brief 54/08. This Brief updates the Information Sheet 07/08 that was released on 15 September 2008.
A copy of HMRC’s Information Sheet can be accessed at www.hmrc.gov.uk. In the search facility, search for VAT Information Sheet and follow through the options to Information Sheet 07/08. The Revenue & Customs Brief 54/08 can also be accessed in the same way.
If you wish further advice speak to your contact at Wylie & Bisset on 0141 566 7000 or email
info@wyliebisset.com
