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Take care with rental plans
Shropshire house builders are resorting to renting out new properties before they sell them due to a shortage of buyers.
But Mike Russell, of Dyke Yaxley Chartered Accountants, in Shrewsbury, said such a move could have serious VAT and tax implications.
"With the credit crunch biting, the housing market has been in real decline, and many house builders and developers have been forced to look at alternative approaches to their business."
"They have decided to let out the properties they have built until the market picks up, with a view to selling them when economic conditions improve."
"And although this rental route will provide an income in the meantime, developers should be aware of the VAT and tax implications."
Mike said letting out a property before selling it may affect the VAT the developer can recover - and they may find they have to pay back a portion of the VAT they've saved.
"House builders must make a clawback adjustment as soon as the actual or intended use of a property changes - and you will need to keep evidence of the change in circumstances to back up your calculations."
"There are calculations that can be made to see if you are affected, and if you are, you will have to recalculate and adjust your past VAT recovery - it may also restrict the amount of VAT you can claim in the future."
Mike said to avoid such difficulties, some house builders have considered selling the properties to a connected company to secure a zero-rated sale.
"But there are some VAT and direct tax consequences involved in selling a property in this way, so it's important to think very carefully before you take this step."
"House builders and developers who are unsure of where they stand and how they may be affected by these rules should ask for professional advice."
"Getting things wrong could lead to a VAT enquiry and you could be asked to pay back not only a large amount of VAT, but extra financial penalties too."
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