By Rob McCann, Director, The VAT People

The complex nature of VAT and all of its intricacies mean that businesses very often misinterpret the rules, unwittingly flout regulations or miss out on opportunities for savings – and property developers are no exception. A shared lack of understanding regarding VAT among land and property developers runs the risk of incurred fines.

We regularly work with property developers that have failed to make the most of potential savings that could have made a considerable difference to their operations. This widespread lack of knowledge can also prove costly due to firms unknowingly flouting regulations, leaving them facing potential fines from HMRC.

Although some property developers we deal with do have some knowledge of general issues regarding VAT, more often than not they will still require advice on the intricacies of each scheme that could apply to them.

Due to the large sums of money exchanged in land and property transactions, any inaccurate assumptions made by businesses in this field can prove dangerous and incredibly costly.

Here, we explore the issue of VAT for land and property developers in more detail.

Registering for VAT

Land and property developers must register for VAT with HMRC when their taxable turnover is more than £85,000. To calculate your taxable turnover, you should add up the total value of products and services sold in a 12-month period that is neither exempt from VAT or outside the scope of VAT.

VAT cannot be charged on goods and services that are exempt, and cannot be reclaimed on any goods and services that have been incurred in relation to exempt business activities.

What are the most common VAT mistakes made by property developers?

The three mistakes we see land and property developers make most often when it comes to VAT are:

  1. Failure to declare VAT on a property sale, when VAT is in fact due
  2. Failure to consider the negative VAT recovery impact of selling or renting property on a VAT-exempt basis
  3. Failure to consider VAT at the appropriate time, often leaving it to the last minute

It is imperative that property development businesses consider the VAT impact for each individual project at the earliest possible stage to prevent incurring higher costs than necessary at a time when planning ahead is crucial.

Where can savings be made?

Numerous VAT reliefs are available for property developers; however, they are quite often overlooked. For example, the reduced rate of VAT is applicable to qualifying services provided to contractors in relation to projects involving a change in the number of single-household properties in a building, or where there has been a change in the use of a residential building.

This rate, which stands at 5%, is applicable in cases where:

  • Self-contained dwellings are created from non-residential buildings
  • A house is converted into a flat (or vice versa)
  • The property has been empty for two years at the time the project commences

In order to recover the VAT on related expenditure for commercial property, it is often beneficial for a developer to charge VAT on the rent or sale income that it will generate from the developed property. However, this will often require the developer to formally “opt to tax” the property, a step that is often missed.

What sanctions can be faced by property developers?

Due to the high-cost nature of land and property transactions, HMRC will often review the treatment of such exchanges, as well as large claims for input tax that may be submitted by property developers.

It is therefore vital that land and property developers take advice in relation to their VAT liability for transactions and the VAT recovery position on large purchases.

Property developers are advised to seek out training on all aspects of VAT to ensure they are compliant with the requirements that are expected of them relating to their specific circumstances.