Residential property development and VAT

The business model of buying existing dwellings, refurbish/renovate for onward rent or sale does not provide any VAT recovery on costs.

The rental or sale income is VAT exempt and so all VAT on costs is irrecoverable.  To register for VAT the business must have some taxable income which is either standard, reduced or zero rate. The landlord/seller cannot “opt to tax” the property as an OTT can only be applied to commercial property or bare land.

The VAT partial exemption deminimis rule allows recovery of up to £7,500 exempt input tax per year  but has a number of important conditions;

• The business must have a mixture of taxable and exempt income. HMRC categorise these businesses as “partially exempt”;
• The exempt input tax must be less than 50% of total input tax;
• If exempt input tax exceeds £7,500 in a year, none is recoverable.

Even when a residential property developer is unable to register for VAT because it makes only exempt sales it could legitimately minimise irrecoverable VAT on costs by ensuring that it’s builders correctly charge VAT at the reduced rate on construction services currently 5%, in the following circumstances;

• When the dwelling has been empty for at least 2 years before refurbishment commences OR
• When works change the number of units , for example from a single household dwelling to two flats/apartments.

If a residential developer has taxable income in another entity, speak to the James Cowper Kreston VAT team to determine whether combining the two activities in one entity could be beneficial for VAT.