13 March 2019
Property VAT can be extremely complicated. The values involved even on a small purchase mean the VAT treatment will be material for most organisations. There are different rules for each type of property, which are then overlaid by special rules for different types of organisations. VAT might be removed or reduced on construction, or might be recoverable – all dependant on the particular circumstances.
Why does it matter?
The VAT treatment is determined by a number of factors. Some property related transactions will be subject to VAT and others not; in some cases clients can choose to charge VAT. There are some reliefs available to remove the VAT cost of property, including where there is qualifying residential or charitable use. These reliefs are extremely valuable and can result in multi-million-pound savings for clients.
Post-transaction or purchase there is normally an adjustment period which lasts ten years. This requires proactive monitoring and if the use of the property changes (including disposal), then this can result in a VAT charge. This removes flexibility and clients must be mindful of both the potential VAT cost penalties (up to 100% of the VAT in issue) if an error is made.
Are there any risks?
HMRC frequently litigate against taxpayers in respect of property issues. This has included litigation that resulted in a charity being unable to remove the VAT cost of a new building. HMRC lost a case against an educational establishment in respect of qualifying use but continue to apply their preferred position to other providers.
HMRC recently also won a case in respect of a disused public house being converted into dwellings. As the public house already had some accommodation, the conversion did not qualify for VAT relief due to the nature of the design. This has the risk of making projects no longer economically viable.
HMRC also recently ‘clarified’ a concession that will result in an increased service charge costs for tenants. This will increase costs for existing leases.
The VAT treatment can be damaging to business and can reduce the ability to produce more housing – which is contrary to general public policy.
What do I need to think about
If you enter into any property development or transactions you should establish the VAT and tax position. There might be some planning that could be used to reduce the VAT costs. Regardless, financial certainty and the ability to demonstrate reasonable care is important.
Can we help?
Alternatively, visit our property sector page to see how our expertise can help you.