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VAT reclaimable on property

VAT reclaimable on property

If a property development business has reclaimed the input tax on building a new property, as the intention is to sell it, but then rents the property out, and does not charge output tax on the rental, what happens about the VAT already claimed?
They also buy and renovate old properties, to sell or rent. The input tax while under development falls under the partial exemption rule.What happens to the input tax claimed if they then rent those out before selling them?
Lin Williams


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06th Jul 2005 12:25

These issues (use, intention, change of intention, claw back, capital goods scheme, renovations, rental, option to tax) are too complex to discuss in sufficient depth here. I imagine there are large amounts of VAT at stake so I would urge you to seek assistance to ensure projects are structured properly. I have seen millions of pounds of VAT lost needlessly in the past because advice was not sought in advance.

You do not mention if the property is commercial or residential. This will make a difference (for the property bought for renovation).

With regard to your first question;

Input VAT in the construction will have been claimed on the basis that the intention was to make a taxable supply. If the intention changes (and the new intention is to make an exempt or exempt and taxable supply) before the actual supply is made (and less than 6 years after the VAT was claimed) then the VAT must be repaid.

If the cost of the building exceeds £250,000 there will also be adjustments to be made under the Capital Goods Scheme.

Input VAT incurred in renovating a property should not be apportioned using the partial exemption scheme if it can be said to relate wholly to an intended taxable or exempt supply. Again, where there is a change of intention there may be a claw back of VAT claimed or repayment of VAT previously disallowed.


Paul Taylor
VATease - VAT Advice

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05th Jul 2005 15:52

Capital Goods Scheme
Not sure if the Capital Goods Scheme would be an issue with your case?

I believe it comes into effect if the building costs were more than £250,000 (Net). If so the VAT on the building costs can only be recovered if an election to tax the rental income is submitted, Output VAT should then be charged on the rental income.

If the property is then transferred/sold to another company within 10 years a proportion of the input VAT recovered on the building costs is repayable to HMRC!

I only came across this scheme the other day and have not examined it in detail, therefore I am not positive the above is correct (a little disclaimer!) hopefully someone else will be able to confirm this for you.

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By NeilW
05th Jul 2005 12:57

The VAT claimed would have to be reversed if you keep the building. It is different from declaring an option to tax which puts VAT on the rental.

The way round it is to have another company under the same ownership which does the renting, and then the transfer property to that company. That allows you to keep the VAT reclaim - but has knock on effects in terms of association of companies.


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