VAT issues for property developers & investors
Make sure correct amount of VAT charged
For VAT purposes, property related supplies can be exempt, zero rated, 5% rated or standard rated, and as the underlying values of property related supplies can be very substantial the related VAT can be equally significant. You should therefore be very careful to ensure that your supplier charges you the correct amount of VAT or you may find yourself out of pocket.
Unfortunately, many contractors choose to charge VAT at 20% because they are unsure what rate they should apply and wish to protect themselves from the danger of undercharging. You need to ensure they don’t do this, because if you are charged the wrong amount of VAT you are not allowed to claim it back on your VAT return. If you do so you may incur penalties, as well as having to repay the over claimed VAT. In any case, whilst a property developer is usually VAT registered, most property rental business are not, so a reclaim is out of the question.
Your only option is to go back to the supplier and get a credit note issued, but that is not always possible (e.g, where the supplier has gone out of business or is otherwise difficult to get hold of), so it is essential that your supplier charges you the correct amount of VAT in the first place.
Design and build contracts can reduce VAT payable
VAT on ‘professional fees’ (e.g, re architects, surveyors, project managers etc.) that are supplied in connection with property development are standard rated (20%) for VAT purposes if supplied separately to the actual ‘construction services’, regardless of the VAT rate applicable to the developer’s onward supply.
However, if those same services are supplied as part of a ‘design and build package’, the VAT rate applicable to the professional services is the same as the rate applicable to the construction services, because the professional services are part of a ‘composite supply’.
Landlord A converts a dwelling into 2 dwellings and then adds them to his buy to let portfolio. He contracts separately for construction costs and professional services (architects & project management). Construction costs are £100k + £5k VAT (a 5% VAT rate applies where additional dwellings are created), and professional fees are £30k + £6k VAT (standard rate VAT of 20% applies). Total costs = £141,000
Landlord B converts a dwelling into 2 dwellings and then adds them to his buy to let portfolio. Landlord B’s project is therefore exactly the same as Landlord A’s, except that he has one contract with a ‘design and build’ company which covers construction costs and professional services (architects & project management). The total cost net of VAT is once again £130k (£100k + £30k), but this time total VAT charged is £6.5k (at the 5% rate). Total costs = £136,500
Landlord B saves £4500!
NB. In some cases you may wish to use a number of different suppliers for different elements of the project, in which case it may be worthwhile forming an additional company which can then provide the design and building services to the developer company at the composite VAT rate.
‘Self-supply’ for VAT
If you use your own or your employees labour in the course of (a) constructing a building, or (b) increasing the floor area of a building by 10% or more, or (c) constructing a civil engineering work, or (d) carrying out demolition work in connection with (a)–(c) you will be deemed to make a ‘self-supply’ of services to your own business for VAT purposes if the value of the services rendered is £100,000 or more and the services would have been subject to VAT at the standard rate if supplied by a third party.
A person not registered for VAT must notify HMRC they are liable to register 30 days before project completion.
VAT must be accounted for on the open market value of the services performed (subject to the de minimis limit of £100,000) in the VAT return for the period in which the services are performed. The output tax on the self-supply can be recovered as input tax in the same period to the extent that it is attributable to taxable supplies under the normal rules, i.e. to the extent that the building in question is used or to be used for making taxable supplies.
- where the building or work is occupied or used for a taxable business activity, or is sold or let after the exercise of an option to tax, the VAT payable under the self-supply rules should be fully recoverable
- where services were supplied in connection with a building used wholly for exempt purposes or one where an option to tax hasn’t been exercised, the self-supply VAT is not recoverable; and
- where the building or work is used partly for exempt and partly for taxable business purposes, VAT on the self-supply charge is recoverable according to the partial exemption method used.
You may therefore need to monitor usage of your employees labour on certain projects.
- VAT on Residential Property Projects
- Key points and changes from the Autumn 2017 Budget
- Top Five Often Forgotten Business Tax Deductions
- £1 Million Tax Free on Death – Fact or Fiction?
- Date changes for ‘Making Tax Digital’
- What now for ISA savings?
- The state shovels in your coffers
- VAT on property – The Capital Goods Scheme
- Property developers – Extracting profits as capital
- Buy to let investors – don’t pay too much stamp duty land tax!