The tax man commeth

Rob McCann, Director at The VAT People, suggests there’s more to VAT than meets the eye.

VAT is a complex area that is difficult for many businesses in a wide variety of sectors to grasp. Even those with a reasonable degree of knowledge of VAT and how it works often have limited understanding when it comes to the particular nuances relevant to their operations. Property developers are by no means exempt from this and regularly fail to recognise areas in which potential savings could have been made.

Very often, developers make inaccurate assumptions about their VAT responsibilities, which can prove to be risky considering the large sums of money involved in such projects. This is particularly true for smaller-scale developers.

All businesses must register for VAT with HMRC when the taxable turnover for their business amounts to more than £83,000. Calculating taxable turnover is simple: you should add up the total value of everything you sell in a 12-month period that is not considered to be exempt from VAT or outside the scope of VAT.

VAT should not be charged on goods and services that are considered to be exempt from VAT, while it also cannot be reclaimed on any goods and services that have been administered in relation to exempt business activities.

Common mistakes include     

  • Failing to declare VAT on a property sale     
  • Missing out on the opportunity to recover VAT by failing to consider the implications of selling or renting property on a VAT-exempt basis     
  • Failing to consider VAT at the appropriate time. VAT is regularly considered at the last minute, often when it is too late to plan to reduce the cost of a particular project.

A number of reliefs are available to property developers calculating their VAT responsibilities and should be considered from project to project. The reduced rate of VAT is applicable to qualifying services provided to contractors relating to projects that involve a change in the number of single-household dwellings in a building. This also applies to cases in which there is set to be a change in the use of a residential building.

The 5% reduced rate of VAT applies if:     

  • Self-contained homes are constructed within non-residential buildings     
  • A house is converted into a flat, or a flat is converted into a house     
  • Work is carried out on a property that has stood empty for two years at the time the work commences.

Commercial property developers can also recover VAT on related expenditure, but they must adhere to certain regulations in order to do so. It can be beneficial to charge VAT on the rent or sale income that the business will generate from the developed property. However, this approach will often require the developer to formally opt to tax the property, a step that is often missed.

Property developers should seek professional assistance when it comes to ensuring they are compliant with all aspects of their VAT obligations. Without this, they run the risk of being subject to an investigation from HMRC, which could lead to considerable costs if it is discovered they have flouted regulations.    

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