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Can’t sell your property and thinking of renting it out?

With the slow down in the property market, many businesses are unable to sell newly constructed property. The obvious solution is to try and rent in the short term until buyers can be found. However, this course of action could lead to a hidden VAT cost.

The sale (freehold or lease exceeding 21 years) of a new dwelling by the person constructing is zero rated for VAT purposes. This means that VAT incurred on the construction of such buildings is recoverable. In practice this may only be the VAT on legal and other professional fees, as most of the construction costs will be zero rated. However, in other cases, there could be significant VAT on builders materials.

However, if you let the building on a short term basis (any lease of less than 21 years), this will be an exempt supply. This means that you may have to pay back some of the VAT already reclaimed under the partial exemption “clawback” rules. The rules are complex but in essence, you will have to apportion the VAT already reclaimed on a fair and reasonable basis. If you do eventually sell the building, a further VAT adjustment can be made to reflect the actual use.

The clawback rules will also apply to the letting of converted property (i.e. commercial to residential). In such cases, there will be more VAT at stake as the conversion works will have been liable to VAT at 5%.

For commercial property, lettings are exempt unless you opt to tax. Prior to letting such property, you should seek professional advice as the option to tax is generally irrevocable for 20 years. This will mean that all future lettings and the eventual sale of the property will be liable to VAT. This decision could affect the marketability of the property, depending upon its location and type of buyer/tenant it is likely to attract. The rules for property and VAT are complex and the cost of getting it wrong can be very significant.

I would like to think that HMRC would take a lenient approach to this point, in the current climate. However, they are generally unsympathetic to cash flow issues, at this or any other time of economic difficulty. 

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Date: 29th August, 2008
Author: Jane Stacey


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