Here are 10 things Menzies Property and Construction sector team believe all property developers should be mindful of.
1 – Plan your structure
Planning is key – new rules make the use of SPV’s potentially less attractive going forward. This is due to the risk that the extraction of the profits on liquidation will be regarded as a dividend rather than capital on which entrepreneur’s relief may apply giving rise to a higher tax charge.
2 – Additional 3% stamp duty land tax charge
The 3% SDLT surcharge does not include any exemptions for property developers acquiring residential property. This must therefore be incorporated into costings for the development, unless you acquire non-residential or mixed use property as part as the same transaction.
3 – Land remediation relief
A little known tax relief that enables developers to include a 50% enhanced deduction for certain costs incurred in cleaning up the land or property including, for example, removal and disposal of Japanese knotweed, asbestos and other toxic substances.
4 – Construction Industry Scheme (CIS)
As a property developer you may be liable to register as a contractor under the CIS. The obligations include having to verify payments being made to people you hire to undertake work for you, such as plumbers, builders and carpenters as sub-contractors, and to deduct tax from payments you make to them where HMRC require you to do so.
5 – Annual Tax on Enveloped Dwellings (ATED) rules
If you trade through a corporate and have acquired or are building a residential property that is worth £500,000 or more, you will need to consider the ATED rules. This is the case even if the property is being held as trading stock for sale. However, substantial penalties for failure to comply can arise.
6 – Check the VAT treatment of your development
The VAT rules for property transactions are highly complex and getting it wrong can result in significant VAT and penalty costs. If intentions change during the course of the development (e.g. deciding to grant short rather than long leases), the VAT position should be reviewed.
7 – Beware of exempt supplies
Many property transactions are VAT exempt. Whilst no VAT is chargeable, it is also likely to restrict the amount of VAT reclaimable on costs under the ‘partial exemption’ rules. This could include a restriction having to be made to VAT reclaimed in the past 10 years.
8 – Make use of the VAT reliefs available
There are extensive VAT reliefs available for residential construction, conversion, renovation and alteration works. If the zero rate or 5% reduced rate can apply to the construction works, this could give a significant VAT saving or cash flow savings. Incorrectly charged VAT is not reclaimable, so it is important that suppliers apply the correct rate.
9 – Take care when using overseas contractors
Overseas contractors will often be registered for UK VAT and charge UK VAT on their invoices. However, if the contractor does not have a permanent place of business (‘establishment’) in the UK, this may be incorrect. In this case it could result in an irrecoverable cost for the UK business.
10 – Recovery of VAT on certain costs is blocked
Residential developers making zero rated supplies (e.g. sale of new dwellings) can generally reclaim the VAT incurred on development costs. However, VAT on certain costs (e.g. white goods, carpets and fitted furniture) incurred in connection with zero rated supplies is blocked. VAT claimed incorrectly can result in penalties and interest charges.