VAT on property – change of intention

The VAT rules in relation to land and property transactions can be confusing, and the need to consider the VAT implications can almost be an afterthought. This can however have significant implications...

VAT Implications when it comes to a change of use of property

When a property developer purchases land with the intention to build new residential dwellings for sale they are entitled to claim back any input VAT incurred on the land as the sale of residential properties is zero rated. When the property is intended to be rented out then the input VAT cannot be reclaimed as the rental of residential properties are exempt, rather than zero rated.

The above is fairly straightforward and is easy to follow however the issues arise where the initial intentions were to sell the property but since the build the intention has changed to renting out the property but all the input VAT has been reclaimed.

If the intention changed after the tax year in which the input VAT was claimed but within six years HMRC can “clawback” all the over-claimed input VAT. If the intention had changed in the same year then the input VAT would have been adjusted on the following VAT return. This would result in the developers having to include all the over-claimed input VAT on his next VAT return before paying it back to HMRC.

It is important for businesses that are involved in property transactions to ensure they fully consider the VAT implications of any decisions they make as this can make significant changes to the cost of a build.

Property VAT at Haines Watts Scunthorpe

If this is something which you would like to discuss further please feel free to contact us at Haines Watts Scunthorpe and we can discuss your own VAT position.