"PROP DEV LTD."
A client had a personal property portfolio, was looking to quit his day job and enter the property development business and build his next property himself.
About the company
The client had an opportunity to purchase an old pub and was seeking planning permission to raise the old building and erect 4 new flats above a commercial unit, before selling them on. He was planning on quitting his day job and entering the world of property development, overseeing this project himself. If all went well, he was planning to start up a property project management company to oversee the development of future projects for other property clients. The challenge was that the client had no experience in property development and project management, other than owning a few properties himself, and had not considered any tax planning with regards to VAT.
We had an initial meeting to discuss the challenges and pitfalls of property development and put plans in place as to how the client was going to cost up the job, and what assistance he required in managing the project whilst keeping a handle on his running costs. We also discussed VAT on his build costs, and the best structure to put in place for his current, as well as future, projects so that he would be able to reclaim any VAT incurred.
As figures and finance were not his strong point, it was decided that a part-time experienced office assistant was required in order to keep on top of the paperwork and figures and to provide my client with weekly summaries of costings against the original budgets. They also dealt with the payment of suppliers and cashflow. This freed up our client’s time to be able to manage the project on a daily basis, deal with the sub-contractors on-site, and source the best products.
Next, we looked at the VAT issues. The construction of a new build residential property is zero-rated, which means that all the invoices from subcontractors and suppliers have no VAT as long as all the basic conditions for zero-rating are satisfied, which they were. This is acceptable when you employ a project management company, as all the subcontractors and suppliers invoice them and they invoice you in total, with no (zero-rated) VAT. When you project manage yourself, not all of your suppliers zero-rate their invoices, as you may source some materials directly from suppliers, and you need to be able to reclaim any VAT charged.
The solution was to set up a new property development company, let’s call it PropDev Ltd, to manage the development and invoice my client for the development work. My client was the company director and received a small salary from the company as the project manager.
The company was registered for VAT.
The development of the 4 new flats qualified as new build developments so PropDev Ltd was able to reclaim all the input VAT associated with this part of the development, and no VAT was charged on the supply to our client. The construction of the commercial unit on the ground floor was an exempt supply, which meant that no VAT was charged on the supply to our client, but also no input VAT could be claimed on this part of the development by PropDev Ltd. This would obviously add 20% to the build cost of the commercial unit.
Our client registered himself for VAT and opted to tax the commercial part of the project. Opting to tax is opting to bring the property within the VAT regime. Once opted to tax the commercial unit was no longer exempt, but taxable. This meant that PropDev Ltd could reclaim all the input VAT on the build cost of the commercial unit and charged 20% VAT on the supply to my client. As he was now VAT registered, he could reclaim this VAT.
We also ensured that the contract between our client and PropDev Ltd was a design and build contract so that all the input VAT on the architects and surveyors’ invoices were reclaimed too.
We won’t say it was stressless or without it’s problems, but as a first project, it was a success! Our client was able to come within 5% of his budgeted build costs, reclaim all the input VAT on the project, and made a healthy profit on the sale of the units too.
He is now onto his third project and enjoying being in the property business.