Many building firms are now holding completed residential property which is proving difficult to sell in the current property market. One solution is to rent out this property for a short period in the expectation that property prices will recover.

Ordinarily most of the VAT paid on construction costs is recoverable. Unfortunately rents received from the letting of residential property are an exempt supply for VAT purposes.

So potential problem, a builder who both constructs and lets residential property is considered to be a “Partially Exempt” trader. Potentially a proportion of the VAT recovered on the construction work may have to be paid back!

The builder may have to:

. adjust the VAT recovered on his submitted VAT returns

. restrict the VAT to be recovered on current and future VAT returns

. or both
Contact us for advice. For instance if the amount of input tax which can be attributed to the exempt rental income is below a defined “de minimis” amount, no adjustment to past or future returns is required – VAT input tax can be recovered in full.

Provided the exempt input tax is below:

. £625 per month, on average, up to £7,500 per year; and

. is not more than half of total input tax ,

then the exempt input tax is de minimis and recoverable in full.

If you are a house builder, and considering the rental of residential building stock, do contact us at an early stage so we can help you through the partial exemption calculations which are tedious and complex.