Are you looking to develop new houses from the ground up?
Are you looking to convert commercial buildings into residential dwellings?
The problem – 20% VAT on property development costs
If you’re a property investor/developer then you’ll know that the cost of VAT on labour and materials is often 20%, which we have to add on to the refurbishment costs. This increases our costs and decreases our return on investment (ROI).
Is there another way? The answer is, obviously, that of course there is. If you are looking to build and sell new houses from the ground up or convert and sell commercial buildings into residential dwellings then the VAT classification is zero-rated, as shown in section 3 & 5 of the 708 HMRC VAT notice.
A real life client example – claiming back VAT on the conversion of commercial into residential
For the purposes of this article we are going to name my client John to protect his identity. John secures an office block for £300,000. Under permitted development rights, he converts the block of offices into six flats at a cost of £500,000.
He sells the flats for £1,200,000 net of all sales costs, making a significant profit of £400,000. This is an incredible ROI of 50% (assuming that the project is done in one year, unlikely I am sure but you understand the concept).
ROI calculation: £400,000 profit divided by £800,000 times by 100 = 50%.
Of course he does this development in a limited company to claim entrepreneurs’ relief but that is another story.
The interesting thing is that he is able to reduce the £500,000 refurbishment costs by another £100,000 by claiming back the VAT as the project will be zero-rated. As such, he has increased his profit from £400,000 to £500,000 by filling in a VAT form. Simple!!
The return on investment is therefore improved as follows — £500,000 profit divided by £800,000 times by 100 = 62.5%.
Practical steps you should now take to reduce tax on developments that you plan to sell
It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step-by-step guide to implementing this strategy
1. Set up a limited company as a Special Purpose Vehicle
2. Buy the property in the limited company
4. Ask the builders to charge you just 5% on the labour and materials instead of 20% — see 5% VAT on property conversions for more details
5. Claim back the VAT that you have paid in step 4
6. Close down the company and claim entrepreneurs’ relief
Please note that you have to sell the properties rather than keep them. You can of course sell to another limited company that you own.
Next steps — claiming back 100% VAT on your property development
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:
If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.