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HMRC confirms letting strategy is not abusive

03 November 2008

Many house builders are finding they are unable to sell new dwellings in the current downturn, leaving them a stark choice.

They must either leave properties empty until they find a buyer, or rent them out in the short-term while awaiting a market recovery so they can sell.

But renting out new dwellings can trigger a clawback of input VAT, which has previously been recovered. 

In a legal update issued on 31 July, we outlined a method whereby a house builder could transfer a newly constructed dwelling to a company in the same group without triggering a clawback of input tax incurred on the acquisition of the land or the construction of the buildings.

Since then, HM Revenue & Customs (HMRC) has issued further guidance on how it would apply the clawback principle in practice. This was covered in a legal update issued on 16 September. HMRC has now issued a further Revenue & Customs Brief (54/08) confirming that in general, it will not seek to attack the method of avoiding a clawback set out in our July legal update.

As mentioned above, instead of the house builder letting out the dwelling, an alternative strategy for the house builder, in advance of any short-term lets, is to transfer a major interest in the dwellings to a connected person who would not be a member of a VAT group with the house builder.

The connected person would then rent out the properties until such a time as they could be sold. The rentals would be exempt and not give rise to input tax deduction on ongoing costs, including the costs of the eventual sale (e.g. estate agency and legal costs). However, deduction of the VAT associated with the original construction would have been secured. Other tax issues connected with such a strategy are detailed in our July legal update. 

HMRC has confirmed that in general it would not see such a strategy as abusive for VAT purposes.  In HMRC’s view, the arrangement does not produce a result contrary to the purpose of the legislation, since the purpose of the zero-rating provisions associated with new dwellings is to relieve fully from VAT the provision of new dwellings. 

However, HMRC has cautioned that if other goods or services are packaged up with the supply of a dwelling, such as repair, maintenance and refurbishment of dwellings, then this type of arrangement is likely to be challenged. This is also likely to apply to any attempt to include an advance fee for estate agency and legal costs associated with the ultimate sale to a third party.

It is encouraging to see that HMRC is taking a pragmatic view of the difficulties being encountered by house builders in the current economic climate, as evidenced by its approach to the mitigation structure outlined above, as well as its earlier response to the clawback of input tax from house builders letting out property.

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