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VAT on property

Hi 

One of my clients, a commercial trading company (VAT registered business) developed four new flats.The two flats were sold quickly after the completion. The other two flats are rented out at the moment as the company could not find the buyers yet.

I want to know the VAT implications on the following transactions,

1) the flats sold by the company

2) rental Income received by the company & subsequent sale of the rented flats

I look forward to hear from you.

Kind Regards

Syed

Replies

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Answers

By 'developed' I assume you mean 'constructed' or 'converted' (rather than refurbished).

Sales of first two will be zero-rated.

Rentals of the second two will be exempt. This could have an impact on input VAT previously recovered on the development, though I suspect not in this case. Each property has an assumed life of 10 years. You look at the length of the lease in each case, and that proportion of the 10-year life is applied to the input VAT. Such input VAT will then be treated as exempt, and potentially paid back to HMRC. However, the amount of such VAT is likely to be well below the de miminis limits (you apply the proportion to the input VAT on a year by year basis). Say lease is for 12 months, and input VAT was £80k (unlikely to be anything like that amount), spread over two years. 1/10th would be treated as exempt - £8k. But, over 2 years, below £7.5k in each year, so no clawback.

Eventual sale of the rental flats would also be zero-rated (assuming intervening leases are shorter than 21 years).

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BKD

When the client sells the rental flats, at that time would he claim the Input VAT on the professional fee (Architect or Surveyor related to rental flats) incurred at the time of the development. My understanding is that Input VAT on the professional fees (attributable to the rental flats) at the development of the new flats cannot be claimed as rental Income from the flats is exempt.  

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Covered in my first response

All input VAT - including that on professional fees - ought to have been recovered at the time it was incurred. One would not normally wait until the properties are sold until claiming it. Whether or not any of that input VAT would be clawed back as a result of the exempt rentals would depend on the numbers involved. I suspect, but give no assurance, that any 'exempt' input VAT would be below the de minmis partial exemption limits, with there being no clawback by HMRC.

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The VAT is far above the de minimis partial exemption.

May I get any reference what you are saying. The reason is that I could not find it any where though I looked at the notice 706 & 708.

 

 

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Above de minimis?

I find that odd, though it is possible. Can you provide us with some details - amount of VAT involved and timescale of development. Can you also confirm the length of the leases over the properties.

Have a look here

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Thank you for your reply.

Amount of VAT involved is above £20,000 (mainly professional Fee)

Timescale of development - 2 months

Lease period 3 or 4 years only

 

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More detail, please

Is that £20k for the whole development? And I think you need to clarify the assumption made in my first response on this thread regarding the nature of the development - 2 months is a very short time to build/convert 4 'new' flats. (Judging by the performance of planners and builders in this neck of the woods.)

Even if the expenditure was incurred over only 2 months - which 2 months? (Any possibility that it fell across two tax (VAT) years?)

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The total cost of the project is £1 million (inc of VAT) approx. I'm not sure how long it would take to be built. However, it should not take very long and you may assume 4 months instead of 2 months. It will be started & completed in 2013.

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Confusion

What I meant was - was the £20k VAT for the whole project or just the two unsold flats?

But your information is now confusing me - in your original question you said that the company developed (past tense) four flats and two were sold quickly after completion (again past tense). You say that two flats are currently being let out. However you're now saying that the project will be started and completed in 2013. Please clarify exactly what happened and when, and how much input VAT was incurred in respect of the two unsold flats.

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I understand it is making confusing.

The company has started the project in  Jan-13 by completing the initial legal paperwork i.e planning permission, design or architect work. The plan is the company will develop the four flats. Two of them will be let out after the completion for 3 or 4 years and eventually will be sold. The total input VAT of the whole project is £20,000 approx. It is difficult to work out the input VAT incurred in respect of two rental flats. However the input VAT, for example on cookers, washing machines & other white goods can be worked out separately which could be £1,500 approx for each flat. As far as the professional fees are concerned, they are related to the whole project of the four flats. How can we apportion the Input VAT on the professional fee as we would not get separate invoice for each flat.

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So, contrary to your opening question ...

... the flats have not yet been completed. Let's put that confusion to the side and concentrate on the principles involved.

Total input VAT £20k of which £1.5k relates to white goods. So assume the rest, £18.5k, relates to professional fees. Unless there is something that indicates otherwise, it would be reasonable to assume that the £18.5k should be attributed evenly to all 4 flats. So, for the 2 that are rented out, £9,250. Taking the longer of the lease terms (4 years), 4/10ths will be treated as exempt - £3,700. Even if the related expenditure were all incurred in one tax year it is nowhere near the de minimis limits so should be fully recoverable. Caveat - unless the business has other exempt input VAT in the same tax year(s).

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Why not simplfy things and grant a major intertest in both flats to be let. If you grant a 21 year plus lease with a 4 yr break clause then the grant of the initial lease is Zero rated and there is full recovery of Input VAT without worrying about Partial Exemption.

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Good idea, Shaun

Except that the subsequent exempt sales could themselves cause P/E problems. I'd advise a long lease only if it were obvious that the rents were going to result in clawback.

Further, commentary indicates that HMRC will generally disregard a break clause when considering whether a lease is a major interest. The insertion of 'generally' suggests that there may be circumstances in which that is not the case. Without delving into HMRC guidance and case law, I suspect that HMRC could take the view that a 21-year lease with a 4-year break in these circumstances is contrived and therefore not a major interest.

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HMRC do not like break clauses where lease between associated companies but cannot challenge an arms length commercial transaction. Major interests with break clauses have been used since the inception of VAT and are a commercial reality.

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