Property renovations: Potential VAT trap
12th September 2022
VAT can be something of a minefield when it comes to construction, with the VAT rate depending on the specific circumstances. The applicable rate of VAT will vary depending on the project undertaken and should be considered from the outset to avoid potentially costly errors.
The first sale of a newly built residential property will normally be zero rated for VAT, however the sale of an existing property that has been renovated is often exempt from VAT.
While at first glance these two scenarios appear to have similar outcomes because no VAT is charged on the sale, there is a subtle, but important, difference – the ability to recover input VAT.
Where a VAT exempt sale is made input VAT cannot generally be recovered from HM Revenue & Customs, and overlooking this could prove costly, as demonstrated by the example below. In this example the profit on the project is reduced by almost a third as a result of incorrectly believing that the input VAT would be recoverable. We would always advise confirming the VAT position before committing to a project.
| Exempt sale | Assumed zero rated sale | |
| Sale proceeds | £375,000 | £375,000 |
| Purchase price | (£200,000) | (£200,000) |
| Costs of refurbishment etc. (£100,000 + VAT) | (£120,000) | (£100,000) |
| Profit on project | £55,000 | £75,000 |
Disclaimer - All information in this post was correct at time of writing.
