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.

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As widely leaked/predicted the standard rate of VAT has been reduced to 15% from 1 December 2008. This reduction will be effective for a fixed period of 13 months. From the 1 January 2010 the rate will revert to 17.5%.

For VAT registered traders this creates a number of practical problems and issues, which we try to help with here

1. All sales on or after 1 December 2008 should be charged plus 15% VAT.
2. Zero rated, reduced rate and exempt sales or supplies are unchanged.
3. Retail businesses should use the new 15% rate on all takings received on or after 1 December 2008 - unless the customer took delivery before 1 December, in which case you should apply the 17.5% rate.
4. If you supply goods or services to other VAT registered customers and need to issue tax invoices, you should add on 15% VAT to all invoices dated 1 December or later - except where you provided the goods or services more than 14 days before you issued the VAT invoice.                                                                                 For example, if you issue a VAT invoice on 1 December for goods or services provided before 18 November 2008, or you were paid before 1 December. In these cases, your sale takes place before 1 December and you must use the old rate of 17.5%. Note if you received part payment before 1 December, use the old rate for the part payment.
5. Under the normal rules all invoices issued and all payments received before 1 December 2008 are subject to VAT at the old rate- 17.5%. There are also optional rules that you can adopt. See section 3 of the HMRC publication recommended at the end of this article for more information on these special rules.
6. If you need to work out the 15% VAT charged in a VAT inclusive amount, multiply by the fraction 3/23.
7. If you have point of sale tills etc that produce a VAT inclusive receipt you may need to contact your supplier to ensure the VAT rate applied is changed for sales after 1 December.
8. If you want to reduce your current (pre 1 December) sales price to reflect the reduction in VAT to 15%, multiply your old price by 115/117.5, this is equal to 46/47.
9. Are you required to pass on the reduction in VAT to your customers? The answer is no - its entirely up to you. Many retailers and other businesses will choose to improve their own margin.
10. If your VAT return period does not begin on 1 December, you will have account for VAT in the quarter which straddles this date accommodating both rates of VAT. If you use software to produce your VAT returns your supplier should be able to advise you on this.
11. Make sure that you follow your accounts software supplier’s instructions regarding the change in VAT rate. If you use Sage Line 50 accounts software you can download instructions from the Ask Sage area, article number 22856 for the standard VAT scheme, and article 22857 for the cash accounting scheme.

HM Revenue & Customs have published a comprehensive guide to the VAT change. You can download it at:
http://www.hmrc.gov.uk/pbr2008/vat-guide-det.pdf. It is quite a large PDF document. If you need specific advice on any aspect of the change please call.

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The purchase of a business as a ‘going concern’ is not subject to VAT. So if you continue with the existing trade in place of the seller, you do not have to pay VAT on the transfer of the trading assets.

A common example would be taking on a public house, if the changeover happens ‘overnight’ or if the pub is closed for just a day or two it would be a transfer of a going concern. However if the pub had been closed for a period of weeks, it would not constitute a transfer of an existing business.

But beware. The reason you do not need to pay VAT is that the transfer of a business is considered to be outside the scope of VAT. If the seller is advised to adopt a ‘broad brush’ approach and just charge VAT because he cannot decide if the transaction really is a bona fide sale of a going concern then you may be denied recovery of the VAT added!

It is important to clarify whether the sale is a sale as a going concerns or not. Don’t hesitate to ask us if this applies to you.

Purchasing property
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Further complications can arise if you purchase a business property which has an existing option to tax applied. This means that all income generated by the property is a standard rated output. It also means that a seller may be required to add VAT to the sale price.

However the seller can avoid this VAT add-on if one of two specific circumstances apply:

• if the new owner makes an election to opt to tax their interest in the same property. This election must be made before ownership is transferred.
• if the new owner is buying the property to convert to dwellings.

In both cases there are prescribed forms to fill in and file.

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From 1 October 2008 HMRC will no longer send taxpayers a postage paid envelope to use when paying their tax or filing/paying their VAT returns.

This apparently is a signal to us all to make returns and payments online.

To ease the payment process HMRC are also about to make it easier to pay our tax by allowing us to use our credit card. Legislation has just been passed that will allow them to recover the credit card charges. HMRC will charge you 0.91% for the privilege.

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