VAT on property development in Portugal

Most cost lines in a development are the same whoever builds the scheme. VAT is not. Whether input VAT on construction and fees can be recovered depends on the vehicle, on its registered activity, and on what the finished asset is used for. The same physical building can therefore carry a materially different cost depending on decisions taken before the site was bought.

That is why the VAT position belongs alongside the structuring decision, not in the accounting workstream after completion.

• Is the project vehicle a taxable person carrying out an activity that gives the right to deduct input VAT?
• How will the finished product be disposed of or used, and does that supply give the right to deduct?
• If the intended disposal is exempt, is a waiver of exemption available and appropriate, and what conditions attach to it?

The answers determine whether VAT on construction is a timing issue costing interest, or an absolute cost of the project.

Full recoverability does not make VAT free. Input VAT is paid or accounted for as the works progress, while recovery arrives through the periodic return and, where a refund is due, after the tax authority's processing period. On a large scheme the amount outstanding at any one time can be significant, and it has to be funded.

Practical consequences for the model:

• VAT should be modelled as its own cash-flow line with payment and recovery timing, not netted off cost
• the funding plan must cover the VAT working capital, since many facilities do not
• refund periods should be assumed conservatively
• the reverse charge on construction services changes the profile compared with ordinary VAT-charged invoices and should be modelled as it will actually operate.

The classic case is a project whose outputs are exempt supplies with no waiver, leaving input VAT unrecoverable. Residential letting is the common example. When that applies, VAT on the entire construction and fee spend becomes a real cost, and a scheme appraised on net figures is suddenly materially unviable.

Partial recovery adds a further layer where a vehicle carries out both deductible and non-deductible activities, requiring apportionment and, in some cases, adjustment over time on capital goods.

VAT recovery is evidence-based. In practice, recovery is lost more often through paperwork than through law.

REQUIREMENTS TO ENFORCE FROM DAY ONE

• every invoice issued to the correct legal entity, with the correct tax number
• invoices dated and described so the supply is identifiable
• contracts consistent with the invoicing treatment applied
• the reverse charge correctly reflected by both parties
• periodic returns filed on time, with supporting records retained
• a single point of responsibility for the VAT position across the project team.

The disposal route interacts with VAT as well as with income taxation. Selling completed units, selling the asset as a whole, and selling the shares in the project vehicle are three different supplies with three different treatments. A structure optimised for one route can be inefficient for another, which is why the intended exit should be identified at structuring stage and revisited before the sales strategy is fixed.

• Appraising a build-to-rent residential scheme on net construction cost.
• Assuming recovery without confirming the vehicle's activity and registration.
• Professional fees invoiced to an individual or a foreign entity before the vehicle exists.
• No working capital allowance for VAT outstanding between payment and recovery.
• Waiver of exemption assumed to be available without checking the conditions.
• A change of plan from sale to rental late in the project, with no VAT re-analysis.