VAT: case study of a new house developer

As part of our series of articles about VAT and property development please find an outline a recent case study where our advice enabled a small independent new house developer to make a substantial reclaim of VAT on the costs of the development.

Our client is a property developer, with two distinct activities, short-term rent from a residential property portfolio, plus construction and outright sale of new dwellings, typically in modest sized developments of two or three houses.

The business did not register for VAT because they mistakenly thought that you need VAT standard rate sales to register and their income streams were VAT exempt and VAT zero rate.

It was clear that the developer did not realise that the supply of a VAT zero-rated construction service did enable a VAT registration. The VAT registration would then provide a mechanism by which they could reclaim the VAT on related costs, essentially the building materials, sub-contractor costs and professional fees.

The zero-rate construction of a new residential build does not extend to loose furniture, “white goods”, and carpets. The input tax on these is specifically excluded by HMRC under a ‘Blocking Order’ meaning the input tax is not reclaimable.

As the client also received short-term rent from residential properties, the income from this was exempt from VAT meaning the business is “partially exempt” so input tax on overheads such as audit fees were only partially irrecoverable. VAT on the costs of the repairs to the let residential flats was also irrecoverable.

We successfully backdated a VAT registration application and submitted a long first period VAT repayment return for a considerable refund.

The VAT rules on property development can be complex and we would recommend that you seek advice professional advice on the issues arising - get in touch with one our experienced Indirect Tax Services team here.