A lot of articles have been written recently about 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 (which are zero-rated supplies of new dwellings), to the short-term letting of houses (which are exempt supplies). Although a change from taxable to partially exempt supplies can affect a housebuilder’s VAT recovery position, the Revenue allows the application of a de minimis rule to ascertain if the level of partially-exempt activity should affect VAT recovery.
However, it's worth bearing in mind that you do not have to concern yourself with a partial exemption/de minimis approach (and the possibility of incurring a proportion of irrecoverable VAT) if you adopt an alternative strategy.
This involves transferring your interest in the completed dwelling to a connected person (who would not be a member of your VAT group) who then enters into the short-term letting arrangements. In this way, the initial transfer qualifies as a zero-rated supply of a new dwelling, and therefore facilitates full recovery of input tax incurred. The subsequent grant of tenancies by the connected company is exempt from VAT. According to the Revenue, this is not an abusive practice.
This is another example of why successful property development is all about avoiding the traps.
Steve Petty, Commercial Property Lawyer