VAT Property Refurb

by **marc02** on Sun Oct 23, 2011 5:56 pm

I am about to spend significant funds on refurbishing a property portfolio. The expense for the coming year will certainly be more than the income. Since we do not charge our tenants (all residential) VAT we cannot reclaim VAT for the refurbishment. Would it be legal to setup a second company with the following structure:

Original company would own and lease and maintain and refurbish the properties to the second company. This company would be VAT registered.

The second company would sub-lease to the residential tenants. This company would not be VAT registered.

This structure would allow us to reclaim the VAT on the refurb while not raising rents.

Any obvious down sides? Or legal issues?

Thanks

by **pawncob** on Sun Oct 23, 2011 8:40 pm

Please explain how you think this would enable you to reclaim the VAT.

by **marc02** on Sun Oct 23, 2011 11:15 pm

Reclaim VAT by registering the origional company for VAT. It would then be the origional company that would pay for all the refurb, hardware, services etc and reclaim the VAT from these expenses?

by **Generix** on Mon Oct 24, 2011 9:59 am

marc02 wrote:Reclaim VAT by registering the origional company for VAT. It would then be the origional company that would pay for all the refurb, hardware, services etc and reclaim the VAT from these expenses?

Ok so original company recovers the VAT on the refurbishment.

(a) Presumably it will recharge this to the new company, and will have to charge VAT.

(b) So how does the second company recover the VAT?

(c) Also if the original company leases to the new company, then this would be exempt income and you still have recovery issues.

by **marc02** on Tue Oct 25, 2011 12:16 am

The original company will not recharge the costs to the new company as the lease will cover this. Ie the original company will be responsible for the maintainance of the properties. The same as a tenant in a property may require the landlord to fix the boiler, - the landlord would not recharge this to the tenant if it is part of the landlords requirement in the lease.

So this means the original company reclaims vat on any refurb or expenses and only adds vat to the rent it charges the new company.

I'm not familiar with exempt income.

Thoughts?

by **Generix** on Tue Oct 25, 2011 9:47 am

marc02 wrote:The original company will not recharge the costs to the new company as the lease will cover this. Ie the original company will be responsible for the maintainance of the properties. The same as a tenant in a property may require the landlord to fix the boiler, - the landlord would not recharge this to the tenant if it is part of the landlords requirement in the lease.

So this means the original company reclaims vat on any refurb or expenses and only adds vat to the rent it charges the new company.

I'm not familiar with exempt income.

Thoughts?

Assuming these are domestic residential properties, then the rent income will still be exempt and the input VAT incurred related to that rent will be irrecoverable.

Unless I'm missing something?

by **marc02** on Tue Oct 25, 2011 1:45 pm

Just to make sure I have understood;

a. No VAT is added to residential properties. (In this case the origional company would not add VAT to the rent it charges the new company)

b. Are you saying that because we are dealing with residential, the origional company would to be allowed to reclaim VAT for expenses, refurbishement etc?

Thank you

by **Generix** on Tue Oct 25, 2011 2:23 pm

marc02 wrote:Just to make sure I have understood;

a. No VAT is added to residential properties. (In this case the origional company would not add VAT to the rent it charges the new company)

b. Are you saying that because we are dealing with residential, the origional company would to be allowed to reclaim VAT for expenses, refurbishement etc?

Thank you

No I am saying if you are dealing with rental income for residential property, then this income is always exempt...which in turn means the related input VAT on refurbs etc is also exempt.

If you add another company to the structure all you will be doing (to my mind at least) is creating a transfer pricing issue which will probably cost you additional VAT (as a mark up will be required).

Whichever way you cut it there will be irrecoverable VAT.

by **pawncob** on Tue Oct 25, 2011 5:34 pm

Now that you've explained what you thought would happen, I concur with Generix. No matter how many companies you intersperse between landlord and tenant, you can't change the nature of the beast. VAT on residential lettings is not recoverable.

by **marc02** on Sun Nov 06, 2011 10:58 pm

Just looking online and found the Opting to Tax; http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&propertyType=document&id=HMCE_CL_000158

I can't say I understand it all, but does this mean I could opt to tax, and thereby reclaim my vat payments?

After the work is complete and the VAT claimed I would then un-register?

Thoughts?