If you are in the property letting business you might find the following information useful\u00a0when appraising the cost of building projects, because VAT and Income Tax can make a very significant impact on your profitability.<\/p>\n
The general rule is that\u00a0short term \u2018net of tax\u2019 costs are lower if expenditure is categorised as being \u2018repairs\/refurbishments\u2019 related rather than \u2018capital\u2019 related. That rule is illustrated by comparing examples a-e below:<\/p>\n
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Capital expenditure<\/strong>\u00a0<\/strong><\/p>\n Most capital costs are not eligible for Income tax relief, but different VAT rates can complicate any appraisal. For example, on a cost of \u00a320k + VAT you might get:<\/p>\n a)<\/strong> \u00a320,000 capital expenditure which is zero rated <\/strong>(zero rating is most common on new build residential property). In this case, there is no VAT, but there is no Income Tax relief either, so your net expenditure = \u00a320,000.<\/strong><\/p>\n or<\/p>\n b)<\/strong> \u00a320,000 capital expenditure which is 5% rated <\/strong>(the 5% rate most commonly applies when work results in a change in the number of dwellings \u2013 e.g, when a house is converted into 3 flats). In this case, VAT increases costs by \u00a31000, and there is no Income Tax relief, so net expenditure = \u00a321,000<\/strong><\/p>\n or<\/p>\n c)<\/strong> \u00a320,000 capital expenditure which is standard rated <\/strong>(e.g, a new extension). In this case, VAT increases your costs by \u00a34000, and there is no Income Tax relief, so net expenditure = \u00a324,000<\/strong><\/p>\n <\/p>\n Repairs & Refurbishment expenditure<\/strong><\/p>\n Repairs & Refurbishment costs are almost always allowable for Income Tax purposes, but it is very unlikely that they will also qualify for the zero or 5% VAT rates. So, whilst the examples once again assume a cost of \u00a320k + VAT, this time the Income Tax rate is the variable, giving us the following comparison:<\/p>\n d)<\/strong> \u00a320,000 repairs expenditure at standard rate 20% VAT will add \u00a34000 to your costs, but if your Income Tax rate is 20% <\/strong>you will receive 20% tax relief on \u00a324000 and your net expenditure =\u00a319200<\/strong><\/p>\n or<\/p>\n e)<\/strong> \u00a320,000 repairs expenditure at standard rate 20% VAT. VAT increases costs by \u00a34000, but if your Income Tax rate is 40% <\/strong>you will receive 40% tax relief on \u00a324000 and your net expenditure =\u00a314400<\/strong><\/p>\n \u00a0<\/strong><\/p>\n In summary, the biggest difference in all 5 examples, is the difference between examples c. & e., with e. being 40% cheaper, than c.<\/strong><\/p>\n It is therefore essential that you analyse and categorise your expenditure very carefully, and that you also obtain good evidence to support that analysis. This may involve explaining the rules to your builders so that they charge you the correct amount of VAT in the first place!<\/p>\n <\/p>\n