Protecting VAT cash flow on residential developments

In a challenging market, a change in use of a planned residential development of new housing may give rise to an unintended VAT cost to the developer. This article outlines a few options for residential developers to consider if they are part way through, or have completed, a residential development, but anticipate, or are having, difficulties in selling the completed residential properties.

The coronavirus outbreak means that a number of residential developers of partly, or completed, new residential developments may need to consider what the best option is at the moment to maximise the return on their investment.  

There are various VAT issues to consider for a residential developer if it anticipates having to delay the sale of any newly constructed residential property. For instance, to suspend, in the short to medium term, any residential development that has been started but not completed, or say complete the development and let the newly completed new residential properties in the short to medium term, with a view to their sale at a later date.

In the first instance, suspending in the short to medium term any residential development that has been started but not completed should not, in, and of itself, create any irrecoverable VAT cost to the developer. This is on the basis that when the market condition improve, the completion of the development and the sale of new residual properties continues as was intended by the developer at the outset.

Alternatively, the developer may decide rather than to market any newly completed residential property for sale, to seek to let them out in the short term, pending an improvement in market conditions.  

Any change in intention by the developer from the sale of newly completed residential property to letting them temporarily till the market improves, will give rise to a potential VAT cost during the period the newly completed residential properties are let. It should be noted that the developer’s original intention to sell the newly completed residential properties must remain, and that any short-term letting is only temporary. If the developer’s original intention has changed/will change entirely from sale on completion to wholly letting on completion, this will result in further VAT restrictions for the developer.

Another option the developer may consider is whether the newly completed residential properties should be sold (either fully or partly completed) to a third party or subsidiary company. The third party or subsidiary company, in turn, lets the residential properties pending an improvement in market conditions which permits the sale of a freehold or long leasehold interest. This arrangement would be undertaken by the developer and could secure VAT recovery on the costs incurred on the development albeit such sale may create a tax charge. 

There are a number of VAT, tax, accounting, and commercial issues that must be carefully considered before making any decision as regards the options above. RSM’s VAT, and real estate and construction teams, are very experienced in matters such as these and in helping developers adapt their business model in these challenging times. 

Please contact Jim Burberry or Philip Munn for more information.

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