Developers warned of rental risks
DEVELOPERS keen to exploit the rental market as a quick fix to the current slump in new build sales are being warned this could be a high risk strategy.
House builders are increasingly becoming landlords in a move aimed at softening the blow of the credit squeeze by generating an income stream from renting out their built stock.
But lawyers are warning that, although it will produce income in the short term, it also gives rise to potential VAT problems.
John Fuszard, head of VAT & Indirect Tax at Hammonds in Manchester and Leeds, said: “The bad news is that if a new house is let on a short lease before it is sold this may result in a clawback of some of the VAT incurred on build or development cost. This could be a real sting in the tail for developers.”
Freehold sales and long leaseholds are zero rated for VAT purposes which allows VAT on costs to be recovered whereas short leases are exempt from VAT which carries no right to VAT recovery on costs.
Mr Fuszard added: “During previous downturns in the housing market, when house builders have let unsold properties HM Revenue & Customs have in many cases reclaimed a proportion of the VAT initially refunded to the builder during the construction phase. They have announced their intention to do the same again.
“House builders need to address the issue as soon as they decide to enter the rental market, assess the extent of any VAT problem and consider what steps to take to mitigate additional costs. Overlooking the issue may result in a dilution of the short term benefits of letting.”
