With the sharp decline in residential property sales many house builders are looking to the alternative of letting out their stock of unsold houses. They should be aware that a tax snare awaits as this sensible stop-gap strategy may attract an unexpected liability to VAT.

In the context of residential property such a tax charge may come as an unwelcome surprise; the sale of new homes is treated as a zero rated supply for the purposes of VAT with the result that VAT is not charged on a sale and the VAT input tax which a builder pays on his expenditure on the building project is fully recoverable. On the other hand, the letting scenario presents a different picture; if a developer lets a new property for a term of less than 21 years the supply is treated as exempt (as opposed to zero rated) for the purposes of VAT.

The effect of this is that the input tax paid on the cost of the building project is not recoverable. This means that a proportion of the input tax claimed in the ordinary course of the building and selling process is clawed back by Revenue & Customs to the inevitable detriment on cashflow at a time when pressures on funding are keenly felt. And, to make matters worse, VAT on the fees incurred in relation to the letting will not be recoverable.

Be aware, however, that it may be possible to take steps to mitigate the impact of these rules provided proper procedures are followed. If we can help please contact us