The current economic climate and the slowdown in the property market has caused some property developers to turn to letting newly-built properties which they are unable to sell. Whilst this provides developers with a source of income in difficult circumstances, it is important that developers are aware of the VAT implications of such action in order to avoid unexpected VAT liabilities or penalties.
VAT incurred by developers in the construction of new properties is recoverable based on a developer's intended use of the property. When the newly built property is sold or a long lease of over 21 years is granted, it is classed as a zero-rated supply. This allows the developers to recover the VAT incurred in the development costs for such properties prior to any sale or long lease being granted.
Developers choosing to let their newly built properties are for VAT purposes making an exempt supply, under which VAT incurred in the construction cannot be recovered. This is because they are then operating as investors instead of developers. Consequently some of the VAT recovered when the developer intended to sell the property must be repaid.
It is likely that the developer's intention to sell a property once the market recovers will remain. If so, only part of the VAT originally recovered by the developer needs to be repaid. It is important to note that such adjustments should be made when the developer's intention changes, not when the new-build has been let. HM Revenue and Customs have stated that such a change of intention may be evidenced by board minutes resolving to pursue short term letting of properties or an estate agent being instructed to let the property in question.
It is therefore in the interests of property developers to be aware of the VAT consequences of letting their new builds, especially during a downturn in the property market when many developers must choose whether to let their newly built properties or allow them to remain empty whilst they look for buyers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
