The downturn in the property world has various effects. Not only are properties failing to sell, but there is a hidden sting in the tail. The reason for this is that when a developer constructs a new house for sale, he is entitled to reclaim the VAT that has been spent out on materials. If the new house cannot be sold, the developer might be tempted to let the property on a short-time basis – say, on an assured short-hold tenancy. Therein lies a bit of a problem, as the ability to reclaim VAT on expenditure depends on there being a freehold sale at the end of it, or else a leasehold sale exceeding 21 years. Letting of property is exempt from VAT, which means that the VAT on the expenditure is not, in principle, claimable.

So if you sell the house, you can claim the VAT; if you let it, you can’t. That could perhaps be regarded as rubbing salt into a wound. However, thanks to a High Court case some sixteen years ago, HMRC were forced to admit that developers should be able to reclaim the majority of the VAT on costs, with a potential disallowance proportionate to the length of time the property remains let.

In the current climate, HMRC have re-issued their guidance in the shape of an Information Sheet, as below, which gives reasonably clear guidance on what developers ought to be doing now, if they choose to let rather than sell, albeit on a temporary basis. The guidance also covers the situation where they are currently letting properties, without having made any earlier adjustment for this problem.

I won’t bother re-printing the entire guidance as I am sure that you are quite capable of reading it for yourself. What I would say, though, is that expert assistance might be useful – anyone who has had to deal with partial exemption will be aware that it can involve highly complex calculations.

VAT Information Sheet 07/08
September 2008

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