As the housing market continues to slow, house building firms may find they prefer to let their newly completed properties whilst waiting for a buyer, rather than leaving them empty for perhaps months. However, doing this can affect the VAT they can recover on the costs of the building work, and HMRC has issued guidance on the matter.
Many house builders are able to recover all the input tax they incur in buying their construction supplies when they sell the property, because for VAT purposes the sale or first major grant of interest in a dwelling is a taxable supply. However, letting a dwelling is an exempt supply, hence input tax on the costs of the building work may not be recoverable. Input tax includes VAT paid on general overheads such as bookkeeping costs during the build.
To find out whether they can still recover input tax on the costs of building work, the house builder can perform a check. This will be based on the expected time period of letting as a proportion of the entire economic life of the building (10 years for VAT purposes). That fraction (for example, 1/10 if the planned let is for one year) is then applied to the total input tax incurred on the costs of building. Provided this does not give a result of more than £625 per month (or £7,500 per year) on average, and is not more than half the total input tax (i.e. a planned letting period of over five years), then the “exempt” input tax is deemed to fall below thede minimis limit, and the input tax can be recovered in full.
If the de minimis calculation does give a result of over £625 input tax per month, or if the result is over half the total input tax, then adjustments may be needed to the house builder’s previous VAT returns and advice should be sought from an accountant or HMRC.