How to account for VAT on a newbuild that has been let

How to account for VAT on a newbuild that has...

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Hi All

My Client is an LLP that has been developing a number of properties over the last 5 years. They have never registered for VAT as have managed to get all new build work done by 3rd parties without being charged VAT (they are aware this approach is incorrect).

They have one house that they were unable to sell and was subsequently rented out for 3 years. This has recently been sold.

There is clearly a VAT element of this build that needs to be repaid, however, as  the Company has never been VAT registered what do we do.

For information, the property cost approx. £100k to build (excluding land costs of £110k) and was sold for £290k.

The Client intends to close the LLP down, now it has no assets or cash, however, there is an added complication which is that this situation is very much on HMRC's 'radar' due to one of the partners having just gone through a very thorough 9 month VAT enquiry of their own.

My initial thoughts are to register the LLP for VAT, calculate the VAT element that would be repayable (I think for 3 years it is 30% of build cost) which would be £30k gross (£5k VAT) to pay, submit 1 return then deregister.

Does anyone have any thoughts on this approach?

Many thanks

Replies (4)

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paddle steamer
By DJKL
29th Sep 2014 21:54

Is it not now an exempt supply?

 

Given no vat reclaimed during works, as not registered, this sale looks like an exempt supply.

The catch appears to be that possibly, in light of previous sales, the LLP broke the registration threshold and ought to have registered. They do not appear from whay you say to have self supplied the works, so I am struggling to see where any input vat clawback issues arise, however I am no vat expert so you really want someone else to provide chapter and verse re any issues.

 

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By spidersong
30th Sep 2014 09:26

What's the issue...

If these are new buildings with planning permission designed as dwellings then the work is zero rated. The liability of the work doesn't change depending on what the owner does with it, they could have rented out all houses and still received the works zero rated, so I'm unsure what approach they think is incorrect?

Given the limited information available the works look to be within Item 2 of Group 5 to Schedule 8 of the VAT Act and the client is in the clear regarding input tax.

However as has been pointed out the client has a liability to register for VAT, which incidentally would have likely allowed them to recover VAT on things such as architects and accountants fees, so it looks like they may have lost out rather than benefited from their incorrectness.

Of course making entirley zero rated or exempt supplies they could have applied for exemption from registration. So they need to look at getting registered or if they've finished everything now letting HMRC know that they were liable and are no longer liable for registration. Given that penalties are calculated on tax lost and they would be in a repayment situation there should be no real issues with this so essentially the client looks to be home free.

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Replying to IANTO:
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By simonmercer
30th Sep 2014 11:54

Thanks Spider

I'm inclined to agree, the position would have been different if the LLP had 'self built' because they would have claimed VAT back on materials as they went. In this case they sub-contacted the entire process to a third party (although not unlinked) so all the costs were invoiced without VAT due to the LLP issuing a VAT certificate.

The concerns comes from a VAT inspector who has been investigating a Company owed by one of the Partners for the last 9 months and her final actions seem to be trying to look into other things that have come up in conversation.

I'm inclined to get the Striking off application in as soon as possible so the Company can get shut down and this is no longer an issue.

 

 

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By spidersong
30th Sep 2014 12:04

"issuing a certificate"?

What did they issue a certificate for, a new build only needs to be supported by the planning application. There is no certificate that can be issued for a residential new build, so what did they actually certificate?

If the building/contracting company is related I might be starting to feel more nervous about their position as if they've zero rated incorrectly they might be the ones subject to an assessment.

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