VAT’s the problem for property developersMake Text Bigger
How to handle VAT on labour and materials for property conversions is a recurring problem for landlords and property developers.
The question pops up regularly from property investors who have ventured in to shared house conversions.
Shared houses, or houses in multiple occupation (HMO) present special planning, VAT and tax problems as they are wrapped up in extra legislation controlling health and safety.
The definitive VAT guidance is laid out in a near impenetrable format in VAT Notice 708 Building and Construction.
Sections 7 and 8 apply to residential property conversions – and section 11 relates to VAT on the supply of materials from builders or direct from builders’ merchants.
Paying the right rate when the supply or service is zero or standard rated is straightforward – you either pay nothing or VAT at 20%.
How to reclaim VAT at the reduced rate is the issue.
Property developers should remember two key points here:
- The reduced rate remains at 5% even though the standard rate increased from 17.5% to 20% early in 2011.
- The property developer does not have to register for VAT to claim at the reduced rate – it’s the builder or supplier’s responsibility to invoice at the correct rate
If the supplier has wrongly charged reduced rate VAT at the standard rate, a property developer can request a refund from the supplier.
The supplier must then reclaim the overpaid VAT from HMRC.
The window for claims is up to four years after the date when the conversion work was carried out.
Property developers should not take ‘no’ as an answer from the supplier – if there was an error, it’s up to them to correct the problem, after all it’s the developer’s money at stake. The supplier is merely a middle man collecting tax on behalf of HMRC and has no loss or gain from the transaction.
TAX TIP for developers and refurbishments: Make sure the builder splits the invoice between repairs/renewals and improvements.
Repairs/renewals are day-to-day expenses that are set off against rental income, while improvements are capital costs carried until disposal of the building and set off against capital gains tax.
Getting this wrong can make considerable over or under payment differences on income tax returns. Tax law says capital costs must not be set off against rental income.
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