The difference between VAT relief and VAT reclaim
VAT can be quite tricky and sometimes difficult to understand. With that in mind, one of our members, Simon Merry from Berthold Bauer VAT Consultants, explains the difference between VAT relief and VAT reclaim.
The key factor with property development is the difference between VAT relief & VAT reclaim. VAT Relief is mitigation at source; this means, for example, contractors invoicing at 0% for new builds or 5% for urban regeneration - instead of the default 20%.
VAT Reclaim is a refund of VAT via a VAT return (and does not carry the cash-flow advantages of VAT relief). Being VAT Registered is only part of the process; the main test is that you are making (or intend to make) the right type of development – primarily sales of new (or indeed newly created) residential units or opted commercial sales & leases.
Be extremely careful of Build to Rent [B2R] schemes, where VAT reclaim is prohibited (unless presented and structured carefully…)
How do VAT errors impact ROI & Costs?
VAT is a rules-based system; some are obvious and well-known, others a tad more obscure. VAT penalties are beautifully simplistic with the standard / default penalty being the VAT plus 70%.
|Paying SDLT on a VAT inflated purchase1||+1% increase in Asset Cost|
|VAT error on Construction charges2||+26% to +34% uplift on Costs|
|VAT error on FF&E3||+3% uplift on Costs|
|Incorrectly drafted JV4||4.8% - 17% reduction in Profit|
Take time to accurately reflect the true VAT charges within your development costs – warts and all!