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Zero-rating of new building

Can the construction of a new residential building intended to be rented out be zero rated?

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Dear colleagues, I would very much appreciate your input on this issue. My client company is about to start construction of a new residential building with self -contained flats which are intended to be rented out on short term leases. Can the construction be zero-rated and thus register for vat to claim input tax? My understanding is that it cannot be zero rated if it's not intended for sale or long lease. What is your view?

 

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paddle steamer
By DJKL
11th Apr 2018 11:34

Who is doing theconstruction works, the owner of the property or a building company invoicing the owner?

The owner appears to intend to let (presumably short term lets) as residential properties, accordingly likely he/she/it will be making exempt supplies re these, thus probably curtailing his/her ability to reclaim any input tax that may be incurred.

The possible solution may be to use an intervening Development entity, ideally on a design and build basis, though this can itself give rise to warranty issues re the professional team so needs carefully structured. Alternative I have used in past is a long lease to another entity on completion pre occupation (21 years down south 20 years up here) who then leases to end users but this has future capital goods scheme implications and of course LBTT/SDLT implications re the lease.

Given vat on property project can be of near equal value to forecast development profits ( say 20%) it is crucial to take paid for advice, whilst I have worked in development for 18 years and accountancy/tax for 32 years I would still , re larger building projects and vat, always bounce proposed structures off an expert, there is just too much money at stake to risk misunderstandings.

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By MGD
11th Apr 2018 12:08

Thank you so much for your response DJKL. You confirmed exactly what I thought. The construction will be done by independent building contractors and because the construction is zero rated anyway there won't be much vat paid by my client. I have suggested the formation of a group company to assign a long lease to, asa the foundations are above ground which group co would in turn short-lease out the flats. The client is convinced that as the construction is zero- rated despite the short- lease intentions he will be able to claim the vat. I disagreed. Thank you for confirming my thoughts. Very much appreciated.

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JCACE
By jcace
11th Apr 2018 12:13

Who will be supplying what here, in terms of construction and letting? You ask whether the construction can be zero-rated, suggesting that there is going to be a supply either of construction services or of the building itself.

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By MGD
11th Apr 2018 12:41

The construction will be carried out by independent contractors and being a new construction it will be zero rated. My question is whether my client can claim whatever vat on the some construction costs even though the intention is to short-lease the flats when completed and not sell or long-lease them.

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chips_at_mattersey
By Les Howard
11th Apr 2018 14:41

You have mentioned two questions:
1. can the construction be zero rated? Yes, leaving aside the issue of white goods, etc, which are not builders' materials. Your contractor will be familiar with this rule.
2. can the develeoper claim the VAT if the finished dwellings are let? Not for leases up to 21 years.
So the thread includes answers to both questions. And, very clear and helpful too, I might add.

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By MGD
11th Apr 2018 15:13

Thanks a lot Les. Much appreciated

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By Justin Bryant
11th Apr 2018 12:38

Someone previously on here said that they get round this by simply granting long (>21 year zero rated) leases to the occupational tenant and then shortly afterwards executing a break clause etc., but surely that is caught by Halifax etc. (they were bragging about having done it that way for many years and it being well known standard VAT planning. I forget who it was).

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By MGD
11th Apr 2018 12:41

Interesting thanks a lot.

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By Justin Bryant
11th Apr 2018 12:59

Just to be clear, I think Shaun King's VAT lease break scheme in the link below is Halifax abusive and does not work:

https://www.accountingweb.co.uk/any-answers/vat-implication-on-new-build...

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paddle steamer
By DJKL
11th Apr 2018 12:43

Would it not just be caught by a CGS adjustment?

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By Justin Bryant
11th Apr 2018 14:06

The (non-abusive) intra group lease trick does not cause a CGS problem as far as I am aware - I have no time today to check that I'm afraid, so please correct that if it's wrong.

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Replying to Justin Bryant:
paddle steamer
By DJKL
11th Apr 2018 14:51

The leasing does not cause an issue (I think)providing it endures for over 10 years, but I think it may be a problem if lease cuts short, however not my forte. (We put one of these in place in circa 1997 but did not start dealing with individual unit disposals until about 2012 ,and at both ends (inception/disposal) we paid a pro (re vat) before we did anything.)

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By Justin Bryant
11th Apr 2018 15:23

Les (as a VAT specialist) appears to have kindly confirmed above the correctness of our comments and Shaun King's lease break scheme is clearly dodgy to say the least re CGS, Halifax or otherwise.

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By Ruddles
11th Apr 2018 17:06

The solution is to set up another company, and sell to that company which then holds the property for rental.

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