Beware the VAT hiccups: Developers and buy to let schemes

Tuesday, April 5, 2011

by Nick Ryan

The downturn in the property sector in 2008 resulted in a concession for residential property developers whereby they could put out to rent those properties that could not be sold but, where a sale occurred later then the sale was still treated as taxable for VAT purposes although the letting was VAT exempt, the new option to tax rule does not apply to residential lettings. Sales of residential property under the new rules are treated as an exception to the two and five-year rules as the sale is always taxable regardless of the period in time from when it was completed and then sold.
Under this concession the developer/owner has retained the right to recover any VAT incurred on the construction of the residential properties but, where a property was let then the developer then had to make a capital goods scheme adjustment at the end of each accounting interval for that portion of the VAT previously reclaimed. For those properties “completed” after 2008, the capital goods scheme adjustment applied from the second interval onwards.
The capital goods scheme has a number of variances, one particular that covers properties disposed of after the termination of an option to tax and it should be noted that this variance does not apply for residential property covered by the above concession.
Therefore, the standard rules for the capital goods scheme apply and the VAT returns being submitted for the January/February 2011 VAT return period should for a number of developers include the first capital goods scheme adjustment assuming they completed the property in 2009. As the developer has in all likelihoods reclaimed the VAT incurred on the construction of the property prior to completion then the capital goods scheme is applied to determine what element of this VAT has to be refunded to Revenue for the VAT exempt letting undertaken. Therefore it is paramount that the developer attributes the VAT incurred for the entire estate on a property by property basis and does so that it is reflective on the costs borne for the construction of each property. Consideration here has to be made for the inclusion within those costs of general site costs i.e. roads, layout and utilities.
But even after completing this primary exercise it might not be as clear cut as that. What if the residential property(ies) in question are part of a larger development/estate which includes residential properties already sold, residential properties neither sold or let, commercial properties. What if the developer has an ongoing obligation to upkeep the estate? What if the developer is incurring ongoing costs against the entire estate or, parts of it?
These questions can easily produce VAT issues notably in relation to the recovery of VAT. If the developer has costs incurred in connection with an estate comprising both taxable and exempt properties then there is a partial exemption position to consider, dual use method to devise and manage together with the management of the capital goods scheme.
Our own experience on this are mixed, some developers have accepted and applied the new rules at least for the direct VAT bearing costs of each property though there have been cases where the ancillary costs have been missed. Some developers have forgotten about the need to apply the adjustment annually and others have misunderstood the rules believing in some instances that the capital goods scheme rules for opted to tax properties applies. The partial exemption position has been largely missed.
All in all developers have another thorn in their side to consider and manage, get it wrong and the pain can be severe.
If you or your clients require more information or assistance in assessing the VAT position of the buy to let properties and the estates in general or in managing the capital goods scheme adjustments and potential partial exemption position then please contact the VAT Practice.

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