Any VAT which is incurred by the developer can be reclaimed by the developer if the developer intends to make “taxable” supplies. These are supplies upon which VAT is charged at either a 20% VAT rate, 5% VAT rate or 0% VAT rate. However, no VAT can be reclaimed if the developer intends to make VAT exempt supplies in relation to the building such as:-
VAT exempt supplies should be differentiated from supplies which carry a 0% VAT rate.
A key conclusion arising from the VAT rules is that VAT has the potential to cause either cash-flow issues or unexpected VAT costs unless these are planned for and anticipated at the outset of a project. Our property tax advisory team at Scrutton Bland is able to steer you through the maze of VAT rules to optimise the financial success of your project. Please contact us on SBTaxPlus@scruttonbland.co.uk if you need any assistance or advice.
Consequently, the intended use of the building will govern the extent of the VAT which can be reclaimed on the project costs. In cases where there is an intention to make a mixture of “taxable” and VAT exempt supplies (which could be the case in the context of a mixed-use building held for investment purposes such as a ground floor commercial unit and residential uppers), the costs attributable to the relevant parts of the building will need to be identified and separated if possible to accurately determine the amount of the VAT reclaim. If such costs cannot be separated then the VAT will need to be reclaimed in accordance with a partial exemption method which is agreeable to HMRC.
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the letting of existing dwellings; or
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the letting of commercial units where no VAT Option to Tax has been made; or
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the sale of a commercial unit which is not “new” where no VAT Option to Tax has been made.
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