A short while ago, we alerted you to the Revenue’s view on the VAT treatment of a house-builder who, in the current climate, alters the nature of its business from the sale of houses (zero-rated supplies of new dwellings), to the short-term letting of houses (exempt supplies). The Revenue allows the application of a de minimis rule to ascertain if the level of partially-exempt activity affects VAT recovery. See http://www.propertypsl.co.uk/node/169 and the link from that page.
However, it seems that some house-builders do not wish to concern themselves with the partial-exemption de minimis test (and the possibility of incurring a proportion of irrecoverable VAT). Hence, they may adopt an alternative strategy to ensure full recovery of VAT. This involves transferring the house-builder’s interest in the completed dwelling to a connected person (who would not be a member of the builder’s VAT group) who then enters into the short-term letting arrangements. The initial transfer qualifies as a zero-rated supply of a new dwelling, and therefore facilitates full recovery of input tax incurred. The grant of tenancies by the connected company is exempt from VAT. According to the Revenue, this is not an abusive practice. For more detailed information, see Revenue & Customs Brief 54/08.