Careful VAT Planning Needed to Maximise Property Profits
Investors deserting the Stock Market to invest in property should be careful that unnecessary VAT costs do not significantly eat into the returns on their investments, Ian Pountney, senior VAT manager at accountants and business advisors PKF, has warned.
"Property investors, like stock market investors, should get expert advice before they buy," he said. "It is usually important to address the subject of VAT early in a contract as, towards the end, disputes may prevent investors obtaining potential benefits."
He said there were seven points in particular that needed extensive consideration before setting out on an investment.
You can register for VAT voluntarily if you are upgrading a listed property for sale. Subject to certain conditions, VAT-registered developers can reclaim much of the VAT where there are major approved works changing a listed building. As you might expect, it is often difficult to get approval for large scale alterations to listed buildings, and any work classified as "incidental repair" will not qualify. Alternatively, for smaller (non-incidental) repair work, the builder may not need to add VAT to the bill.
- Full recovery of VAT on costs is possible for a VAT-registered developer that refurbishes a dwelling vacant for over ten years, where a long lease is subsequently granted or the property is sold.
- Property developers can benefit from a reduced rate of VAT (5% compared wth 17.5%) on the costs of converting residential property, such as flats, and converting business property to residential use. For the conversion to qualify the number of dwellings must be changed - this is examined on a floor by floor basis.
- While VAT recovery is possible on the costs of many conversions or new-builds to create residential property for sale, there can be a catch with multiple dwelling developments. VAT cannot be reclaimed if it not possible for each dwelling to be sold independently - that is, without a covenant relating to the other dwellings in the development.
- A change of the original plans can prove expensive. Where a developer builds a new residential property for sale to a third party, VAT on building costs can be recovered. However, if before the first sale, the developers lets out the property on a short lease (under 21 years and a day) VAT cannot be recovered.
- When an investor builds a block of residential apartments with shared facilities for the residents (for example, a gym or swimming pool), the facilities should be developed and managed by a separate business. If they are developed and operated by the investor, it may result in the investor only recovering part of the VAT on the construction costs of the apartments.
- The interpretations by HM Customs & Excise of the VAT regulations for property development are regularly challenged and can often be subtly changed by an individual court ruling. Choosing to register for VAT may allow you to reclaim VAT, but investors need to consider the ongoing paperwork requirement.
Ian Pountney said: "These are just some of the many VAT factors to consider, but they demonstrate just how easy it is to lose some of the value in your investment which could have been protected with prior planning.
"It is vitally important for the would-be investor to take expert advice on how any property investment should be structured, before even starting to look for suitable property or developments in which to invest."