Maximising VAT claims on property development

Property prices seem stagnant, while building costs just keep going up. However, maximising your VAT recovery on these can ease the pain a little. How is this done?

Cash flow conundrum

When a new house (or any other dwelling, such as a flat or bungalow) is first sold it is a VAT zero-rated supply. This allows the builder to reclaim VAT on any costs incurred in building the property. However, renting (instead of selling) a residential property is an exempt supply, and VAT incurred on expenses directly relating to an exempt supply cannot usually be reclaimed.

Therefore, although letting a property you cannot sell may improve your cash flow, it may stop you from reclaiming VAT input tax. So is there a way to avoid this trap?

The challenge - avoiding VAT

One way of saving VAT is not to pay it in the first place. Below are some tips on how to achieve this if you are building new residential property.

Tip. By using a VAT-registered sub-contracted builder, and getting them to supply the building materials as part of their service, instead of buying them yourself, means that you will not have to pay VAT.

Builders are allowed to zero-rate their supplies to you because you are building a new residential property. They are also allowed to recover the VAT on materials they supply for the job. This means that you are obtaining VAT-free building work and materials.

Example. John is a self-employed plumber working for New Homes Ltd. He buys a bathroom suite from his local builders' merchant and pays VAT on the purchase, which he claims back on his VAT return. He charges New Homes Ltd for supplying and fitting the suite - the entire charge is zero-rated.

Not just for new buildings

Although zero-rating applies only to the construction of new properties, many developments of existing properties that create new dwellings attract a beneficial VAT treatment in the form of a lower VAT rate of 5%.

Tip. As a developer you can ask your builder to charge you the lower VAT 5% rate on certain property conversions, e.g. offices that are converted into flats, or one house turned into two flats.

Work carried out by builders on such conversions is only subject to a 5% VAT charge. The 5% rate also applies to any building materials supplied by the builder in connection with their work.

All-in-one services

Tip. Using a “design and build” contractor allows some services usually subject to 20% VAT to be zero-rated instead.

The services of professionals, e.g. architects and surveyors, are always subject to VAT at 20%. To avoid this you could use a “design and build” contractor as they can treat their services as being “one composite supply” that they make entirely in the course of constructing a new residential property. Consequently, all their charges can be zero-rated.

If you need any more information on VAT or on any other tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

Maximising VAT claims on property development

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