Over recent years, I’ve attended a few seminars about the subject of property development. These are often run by very successful property developers who have learned how to read the property market very successfully and made a lot of money from their investments. Nowadays they focus on the high level financial planning including hedging, fund allocation, property protection and other issues that affect the financial planning for property investment and development. This sort of financial planning is, of course, high level and long term in nature. However they can be a bit basic when it comes to tax. Hedging, fund allocation, portfolio protection and VAT don’t often appear together on the same programme!
But there are a couple of important VAT issues that you should consider at this stage of any property project.It’s important to understand this stuff – if you’ve bought or sold property during extreme property market swings; whether high or low; you’ll know that property investment can be very risky.
So where does VAT fit into all of this?
Financial planning should include VAT from the start
This sort of financial planning is, of course, high level and long term in nature. However they are generally run by financial experts, not tax experts. Hedging, fund allocation, portfolio protection and VAT don’t often appear together on the same programme! But there are a couple of important VAT issues that you should consider at this stage of any property project.
The first thing is that you need to take VAT into account when you’re doing your financial planning right from the start. You might spend a lot of time thinking about the big picture financial side of things, but the VAT costs of any property development could significantly change the project’s VAT liability. Because VAT is a transaction tax, you need to understand how the rules work and factor these into your financial planning right from the start, or you can end up with some very expensive mistakes, in particular you may not be able to claim VAT on costs. It’s all very well hedging your investments but this could all be a waste of time if you end up with a significant unforeseen VAT bill at the end of the day.
The other issue is the corporate side of things. I understand that there are good tax and financial reasons for having the property investment and the operational side of things in separate companies. In some cases, this works for VAT purposes, but in others it could create unforeseen costs.
Like all VAT issues, this ultimately depends on the specific circumstances but a general guide is that if one company (call it Co 1) bears the cost of developing a property, e.g. conversions, renovations; while the other company (Co 2) uses the company as an investment for leasing to third parties, then Co 1 may not be able to claim the VAT on the development costs from HMRC. In some cases, it may be possible to prevent this through some practical VAT planning. But – as I said earlier – this is why it’s important to consider the VAT issues when you’re planning the financial side of the development.
Of course there’s a huge difference between buying your home and going into property development as a business activity. In that situation, it’s always a good idea to listen to experts and get as much help as possible. Most of us don’t have large amounts of money that we can afford to lose, especially if you’re just starting out. That’s why it’s a good idea to take advice from people who have a proven track record investing and dealing in property.
Marie
December 2017