Independent VAT Consultant
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Old VAT concession may save builders

There is a valuable VAT concession for builders who temporarily let out new dwellings, which could save many construction businesses from going over the edge in a recession.

27th Sep 2019
Independent VAT Consultant
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Are we on the verge of another slowdown in the housing market? During the last recession in 2008/09, housebuilders struggled to sell their completed dwellings and had to let some properties on a temporary basis to generate cash flow. This could certainly happen again, but letting new homes creates a VAT challenge for builders for the following reasons.

Zero-rating

Sales of new dwellings built from bare land (ie not conversions) are zero-rated, as long as the deal is either a freehold sale or leasehold sale exceeding 21 years (20 years in Scotland).

There is no problem in claiming input tax on building materials and professional fees, and the services of the builder and any materials the builder supplied are zero-rated.

Exempt

Rental income from dwellings is exempt from VAT unless it is holiday letting. Very short-term lettings, such as night-by-night arrangements through providers such as Airbnb, are standard-rated as they are similar to holiday accommodation. An input tax block applies on the costs of the build if the property is let out other than as holiday lets, under the rules of partial exemption.

The predicament for the builder is that they claimed input tax while the properties were being built because there was a clear intention of making zero-rated property sales. But now the builder has been forced to change their plans and let out some or all of the new homes out temporarily.

Payback and clawback rules

The starting point on this subject is that the input tax treatment in the VAT world depends on the actual first supply that is relevant to an expense:

  • If a business claims input tax because it intends to make a taxable sale, but then changes its mind and makes an actual exempt sale, then input tax claimed in the previous six years is repaid to HMRC in the VAT period when the change in intention takes place.
  • If a business does not claim input tax because it intends to make an exempt sale, but then changes its mind and makes an actual taxable sale, then input tax not previously claimed in the previous six years can be claimed in the VAT period when the change in intention takes place.

The above adjustments are known in VAT speak as the payback and clawback rules (see VAT Notice 706, section 13).

2008 builder concession

I can still recall Peter Mandelson, then Business Secretary in the Labour government, announcing important new transitional rules in 2008 which meant that builders could temporarily rent out new dwellings without a loss of input tax in most cases. These rules saved the day for many builders and they are still in place 11 years later.

In brief, the concession works like this:

  • A completed dwelling is given a 10-year VAT life – so an intention to rent out for two years and then sell means that 20% of the input tax claimed on previous returns is relevant to an exempt supply and 80% is linked to the eventual zero-rated sale.
  • The 20% exempt input tax that needs to be adjusted under the payback and clawback rules will still be claimable in many cases by using the partial exemption de minimis rules – see VAT Notice 706 section 11.

Further reading

For further detail on this topic see VAT Notice 706, paras 13.11 and 13.12. The VAT Information Sheet 07/08 also gives examples and analysis of the calculation process (which can be tricky) so I won’t expand on those further here. The important thing is to ensure you and your clients are aware of the opportunity rather than the detail.

Note the VAT Information Sheet 07/08 has been archived by gov.uk but the information it contains is still current and useful. I recommend that you print a copy and keep it handy if you have builder clients.

Final tip

Don’t forget that costs which directly relate to the exempt letting are excluded from the 10-year concession and are fully blocked under the rules of partial exemption eg the fees charged by letting agents for finding and dealing with tenants.

When the dwelling is eventually sold, the estate agents commission will directly relate to the zero-rated property sale, so input tax can be fully recovered. As the old saying goes: some you win and some you lose.

Replies (2)

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By TwistedAlice
30th Sep 2019 10:54

thank you for the reminder.?

Will this apply individual flats Neil?

What would the disadvantages of selling completed dwellings to a sub co,with commitment to rectify defaults? Presumably only legal fees on sales.

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By robpointon.tiscali
01st Oct 2019 07:18

Hi Neil
Can I take it that if a builder decides to use the building for furnished holiday letting, rather than sell the new build as was the original intention then any clawback would not apply as this supply would be standard rated
Thanks
Rob

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