VAT Adjustments For Temporary Lettings

 
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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

returns

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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