Hi, would be grateful to know if the following is permissible?
Background
In this example a residential property applies the VAT exemption to letting companies and is not to register for VAT.
This same company has been operating a smaller line of business of project management and procurement for other clients.
This company now wants to conduct a significant redevelopment of a residential property it owns.
The company owns and lets other properties so continues to apply the VAT exemption so as not to incur VAT on tenants in their other properties.
A bank loan to the company (which has the required security) will finance the redevelopment.
Question
To reclaim VAT on the redevelopment (and assuming no other VAT reliefs apply) is the following setup allowed:
1. The project management and procurement business is split out of the letting company and a new company is formed which is wholly owned by the original company.
2. That new company becomes VAT registered.
3. The original company “loans onwards” on the bank loan to the newly formed company interest free.
4. The new company through it’s existing trade would project manage, make the purchases of goods and labour and reclaim the VAT. The original company offset the purchases of labour and materials against the loan to the new company.
5. When the project if complete the new company may continue to operate it’s project management business or voluntarily wind up the new company, paying the VAT refund back to the original company as part of the loan repayment.
Is this strategy workable? Any thoughts on a better way to achieve the same?
Thanks
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