One by-product of the credit crunch is the increase in house-builders seeking temporarily to let empty units that cannot currently be sold. Such letting activity changes the nature of the house-builder’s VAT activity from a taxable zero-rated supply of new houses for sale, to exempt short-term lettings. This can have a knock-on effect on the ability to recover input tax incurred by the builder. HMRC has published an information sheet: VAT: Partial Exemption – adjustments when house builders let their dwellings.
This sheet explains that, for many house builders, the amount of “exempt input tax” related to their temporary lets is probably small, and, as a result, they should be able to continue to recover all of their input tax. However, they should use the information sheet to check.