VAT Adjustments For Temporary Lettings
Before letting dwellings which are failing to sell in the
current climate, careful consideration should be given to the VAT
implications which may apply.
Many housebuilders may be considering letting new properties
they have built or converted (from non-residential to residential
properties), where it is not yet possible to achieve a suitable
sale. However, by opting to let, rather than sell new or converted
dwellings, the VAT application will be different.
The sale or grant of a long lease (over 21 years) in new or
certain converted dwellings is zero-rated, giving rise to full VAT
recovery for the builder. However, the letting of a residential
property is VAT exempt. Input VAT is not normally reclaimable on
expenditure attributable to exempt business activities. So, the
shortterm exempt letting of an unsold dwelling may affect the
housebuilder's ability to recover input tax on construction and
other costs. A VAT exempt temporary letting may require the
housebuilder to do one or more of the following:
restrict input VAT recovery on current and future VAT
repay input VAT previously reclaimed on returns already
submitted (a one-off clawback adjustment)
agree a special method with HM Revenue & Customs (HMRC) for
recovering future input VAT.
HMRC recently issued information on two methods to calculate the
one-off clawback adjustment. The calculation must be made as soon
as the temporary letting starts and must be based on a realistic
expectation of the letting period or eventual sale value. HMRC may
also require the housebuilder to provide evidence in support of the
estimations used in its calculations.
The first method calculates reclaimable input tax based on the
estimated eventual sales value as a percentage of the sum of the
estimated sales value, plus estimated exempt rents.
The second method uses the expected letting period as a
percentage of the deemed ten-year economic life of the dwelling,
but this calculation is strongly discouraged by HMRC and is
unlikely to provide housebuilders with a higher VAT recovery rate
than the first method.
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