Letting newly developed property instead of selling
at a loss might seem like a good idea for housebuilders in the
current economic climate. But have you considered the VAT
implications?
In view of prevailing economic conditions for residential
property sales, many housebuilders are looking to let new dwellings
they have built or converted (from non-residential to residential),
where it is not yet possible to achieve a suitable sale. But
letting, as opposed to selling new/converted dwellings, results in
a different VAT scenario.
Selling or granting a long lease (over 21 years) in new or
certain converted dwellings is zero-rated, giving rise to full VAT
recovery for the builder. However, letting residential property is
VAT exempt and input VAT is not normally reclaimable on expenditure
attributable to exempt business activities. Thus, short-term
lettings of unsold dwellings may affect the housebuilder's
ability to recover input VAT on construction and other costs.
