Beware Of VAT Pitfalls, PKF Warns UK Property Investors

by Robert Lee, Tax-News.com, London

09 September 2003

UK investors have turned to property in increasing numbers in recent years after three years of tumbling stock prices forced many to turn to what is widely perceived as a safe investment. However, accounting firm PKF has warned that there are many pitfalls relating to VAT rules that can take a large bite out of potential returns.

Ian Pountney, senior VAT manager at PKF has outlined seven areas regarding VAT rules that investors must consider very thoroughly beofre entering into a property contract:

• 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.

"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," observed Mr Pountney.

"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," urges Pountney.

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