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VAT Problem for House Builders

Newsletter issue - November 08.

In the present climate where house builders are stuck with properties they can't sell, they may be tempted to rent them out.

However, when building firms rent out newly built homes instead of selling them, this can cause VAT problems. This is because new residential properties are zero rated for VAT and letting residential property is exempt from VAT. The amount of VAT charged to the buyer in both cases is the same: nil, but the seller's ability to reclaim VAT on its costs is not. Briefly you can reclaim VAT on costs associated with something you sell which carries zero-rate VAT, but you can't reclaim the VAT when the thing you sell is exempt from VAT.

Where your business has only a small proportion of VAT exempt sales, you may be able to ignore the ban on reclaiming VAT, if the VAT relating to the exempt sales is less than both:

  • £7,500 per year; and
  • 50% of the business's VAT on purchases for the year

Working out how much of the VAT you paid relates to the new properties which are let is not straight-forward. The total amount of VAT on the purchases that relate to those buildings must be spread over 10 years. If the properties are let for say 2 years before they are sold then 2/10ths of the VAT on the costs is regarded as relating to exempt sales. If this total is within the limits shown above, you have no VAT problem.

However, in real life the calculations are rarely that simple. If you are forced to let newly-built residential property please ask us to check your VAT position.

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