Finance - Cashback - Recover French VAT

In France, unlike the UK, you pay VAT at 19.6% on the purchase price of new residential properties and only a minimal amount of stamp duty. If you buy a property more than five years old you generally only pay 5% French stamp duty. This is why new properties often seem more expensive than older ones. You can recover the 19.6% VAT which is regularly done by well known developers such as Pierre et Vacances for UK buyers through the leaseback scheme.

However, you can recover the VAT independently of the leaseback scheme by ‘doing it yourself’, provided you fulfil the necessary criteria in the French tax code which is not unduly onerous. In order to qualify you need to rent the property out for holiday lets on a ‘serviced basis’.

This holiday rental is viewed as a business in France and allows you to register for French VAT. Technically speaking the supply of the property to you is an input upon which you can recover the VAT in the same way as any business recovers VAT on capital goods it then uses in its business. However, as you will now be within the scope of French VAT you will need to charge your tenants (i.e. the holidaymakers) 5.5% VAT on the rents and pay this to the French tax office.

There are two rates of VAT in France for these purposes and the good news is you recover at 19.6% but charge your tenants VAT at the lower rate. It is possible for all this to be handled through the letting agent, which is exactly what happens with a commercialised leaseback package.

Once you are registered for VAT, if you sell the property within the next 20 years you have to pay back the VAT pro rata. So if you purchase in 2001 a property for one million euros excluding VAT, you will pay 196,000 euros which you will recover. If you sell the property in 2006 you are only able to recover 5/20ths of the VAT you paid upon the acquisition i.e. 196,000 x 5/20ths = 49,000 euros. The balance of 196,000 euros less 49,000 euros = 147,000 euros has to be paid back to the French Inland Revenue.

For most people the option of recovering the VAT is attractive. However, many UK people have not been aware of it. What is not on the French Inland Revenue’s website is that it is still possible to recover the VAT paid upon the acquisition of a French property even if you did not register for VAT at the time you purchased the property. The only thing that rules you out of being able to do this is if you have used the property as your main residence (i.e. you have personally lived in it as a French tax resident), which should not apply to UK investors.

Accordingly, if you bought a property in, say, 2004 with the intention of renting it out and you actually did this, then if you come within the criteria for registering for French VAT and do register for VAT you will be able to recover the VAT in 2006 pro rata in respect of a property that was bought two years earlier.

For example, in 2004 Mr X buys a property off-plan for the purchase price of one million euros. He accordingly pays 196,000 euros VAT. From 2004 to 2006 he rents it out and does not use it as his main residence. In 2006 he finds out about the VAT reclaim and decides to register for VAT. He is able to recover 18/20ths of the VAT paid upon the acquisition, i.e. 196,000 euros x 18/20ths = 176,400 euros.

It is important to get the necessary documentation in place and have all the correct forms signed in order to get this through the French bureaucracy and receive your cheque from the French Revenue.

David Anderson, Sykes Anderson LLP (solicitors and chartered tax advisers) Tel: 020 7398 4700 www.sykesanderson.com

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