Myriad of VAT Pitfalls

Partial exemption is just one of the myriad of VAT pitfalls that the property developer and their accountant need to be aware of. Second only to advising our clients on risk avoidance through company structure, we have found ourselves, increasingly, working on VAT across diverse areas of the property development and construction sectors. It is about compliance, of course, but it is also about understanding definitions and ensuring that businesses take the appropriate actions at the appropriate times to avoid exposure to unnecessary charges to the detriment of their balance sheet.

Whether the project is in commercial property or residential development, whether it is at the land sale stage or the property may be about to be let and all the fixtures and fittings are in, VAT sits down at the table and demands its share! In recent months, the sector has stabilised considerably. Driving across our part of the world, to the north and west of London, - Buckinghamshire, Berkshire and Oxfordshire – new developments have started to re-appeal but the progress on some of those already under construction have in some cases slowed to a crawl.

We have seen instances where a residential developer has reacted to the market conditions and let completed homes until the market improves. The first sale of a residential dwelling is a zero rated supply which means that the input VAT incurred can be reclaimed. Rented income is an exempt VAT supply and means that all the input VAT previously claimed on the property is no longer recoverable. If a suitable corporate structure had been in place this trap could have been avoided. Even when a developer finds themselves falling foul of this trap it is possible to reduce the impact and reclaim some of the VAT input tax each year of short term let. This requires expert advice and will not overcome the immediate cash flow impact that denial of recoverability imposes.