Reclaiming VAT for a residential development

[marc02]

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

[les35]

It probably won't work. This is because the onward sale of property, whether by sale or let, is usually exempt. Any VAT due on the supply from the procurement company cannot be recovered.
With the type of arrangement you are describing you would need your adviser to review the impact, if any, of specific anti-avoidance legislation. Arguably, you are inserting an additional step in the arrangement which is not necessary, which means the anti avoidance rules have to be considered.

[marc02]

Thanks for your response. For my better understanding can I clarify please?

a) With regards to onward sale; does it matter that no onward sale is anticipated? Hold and let?

b) The procurement company procures on-behalf of the client and then bills the client (or in this case offset the loan). It is effectively stock and so why could no VAT be reclaimed?


c) What is the possible "additional step in the arrangement which is not necessary?"

[les35]

NewCo is making 'supplies' to the lettings company. You can describe the settlement as a loan if you wish. But VAT applies to taxable supplies. So output tax is due, and cannot be recovered as input tax. This is the VAT loss.

If you do wish to set up a scheme to mitigate VAT losses, a forum is only a starting point. You will need your Accountant to engage a specialist to address the taxation and contractual issues properly.

[AdamS93]

The most fundamental part of VAT recovery is that the input VAT incurred must have a direct and immediate link to a taxable supply. Letting of residential property is always an exempt supply and therefore you cannot recover the VAT.

If you set up artificial steps be prepared for HMRC to challenge your set up. If you set up a new company, that new company will have to charge VAT to the existing company, your set up doesn't work full stop.

If you want to save VAT, engage non-VAT registered traders? far less risky than breaking the law in my opinion.

[marc02]

Certainly want to keep within the realms of what’s allowed, hence putting the idea out there for comment.

The sums involved mean the supplier of materials and building services will likely need to be VAT registered.

I may well come back to this forum about the VAT reliefs available for certain developments and conversions.

Thank you for all comments.