0% VAT rate when constructing residential dwellings
HMRC provides a 0%VAT concession rate under VAT Notice 708 section 3 on residential buildings that is either
– Built from the ground up or
– Convert from a commercial building into a residential building, which has not been residential in the last 10 years
The key criteria to note are as follows:
– it’s built from scratch, and, before construction starts, any pre-existing building is demolished completely to ground level (cellars, basements and the ‘slab’ at ground level may be retained) – see paragraph 3.2.3
– the new building makes use of no more than a single facade (or a double facade on a corner site) of a pre-existing building, the pre-existing building is demolished completely (other than the retained facade) before work on the new building is started and the facade is retained as a condition or requirement of statutory planning consent or similar permission – see paragraph 3.2.3
– a new building is constructed against an existing building so that they share a wall but there is no internal access between them
An existing building is enlarged or extended and the enlargement or extension creates an additional dwelling or dwellings
An annexe to an existing building is built
A building is built that is one of a number of buildings constructed at the same time on the same site
This means that tradespeople can:
– buy materials that have 20% VAT on them but claim it back as part of their quarterly returns
– Invoice you as the developer for the buying and fitting (materials and labour) at 0%
Please note that there are many organisations that will not charge you at the 0% VAT rate. This is why it is important to register for VAT using the VAT 1 form and opt the building to tax using the 1614A form in order to claim back any VAT incurred as part of the construction.
Any VAT incurred during the construction phase may then be claimed back on your quarterly VAT return.
Clawback of VAT claimed on 0% Rated supplies
As HMRC suggests in notice 706 section 13.6 & 13.7 that VAT is claimed back from HMRC because the 0% VAT rate may be claimed back by HMRC. Your intention may have changed because:
– You intended to use them for your business
– You intended to rent the properties out
If the intention as above shows occurs within a 6 year period then HMRC may claw back the VAT.
Example of clawback
A construction company that was previously fully taxable builds a residential property with the intention of selling the freehold (a zero-rated supply). In the course of the work, it incurs an input tax of £15,000. The input tax is directly attributable to an intended taxable supply, so the company claims all the input tax. The property is put on the market, but no buyer is found.
After the end of its long period, the company decides to let the property on an interim short-term lease whilst continuing to search for a buyer. The company originally intended to make a taxable supply. They actually made an exempt supply of a lease. As such VAT previously claimed needs to be repaid under the ‘clawback’ provisions. The company still retains an intention to make a taxable sale of the property. The input tax would therefore be apportioned across the 2 supplies and an amount to reflect the exempt use would be repaid.
If the company decides to take the property off the market and grant a 15-year lease, the only supply would be exempt and an amount equal to all the input VAT would be repaid.
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Removing VAT when buying commercial buildings for residential purposes.
If you are buying a commercial property on which the sale price includes VAT but for which you will convert for example to residential property for either flipping or renting immediately on a purchase you can seek to use a 1614D form with the seller.
Please note that the purchase of a commercial building that is less than three years will still carry the 20% VAT charge as shown on HMRC’s website. This is in relation to Opting to tax land and buildings (VAT Notice 742A).
This form results in the removal or reduction of VAT on the purchase price to you. If there however will be a period during which you will seek to earn income that is not to do with the property being a residential dwelling from the part of the building that long term you will convert to a dwelling(s) then you may not use the 1614D process. More can be understood on this here (see in particular section 3.4.1)
The seller may need to make a VAT adjustment if they have accounted for the VAT on building under the “Capital Goods Scheme” in order for you to benefit from the 1614D. It is likely they will be very reluctant to accept the 1614D however if they are selling the building within 10 years of using the capital goods scheme due to the VAT they will have to pay it back. It will be then your decision as to whether you proceed with the purchase and pay the VAT or choose not to purchase the property.
In all instances it is essential that you secure the signing of the 1614D very early in the sale negotiations – this is not a relief you can secure retrospectively after purchase.
When you convert a property that is not currently used for residential purposes – such as a barn or a pub, then the VAT rules are more complicated. Your sale may be exempt or zero-rated or a mixture of the two – it depends upon what is converted. This VAT liability will determine how much VAT you can recover.
There is a 5% reduced rate of VAT that applies to some conversion work. However many contractors play safe and try and charge the standard rate of 20% on all their projects regardless. In such cases, you made need to persuade them as to the correct VAT treatment and in this case, it may pay to use a VAT advisor. To be fair to builders the VAT rules are rather complex.
Some conversions such as pub conversions are further complicated by the VAT treatment of the sale of the building to the person converting. The building might be purchased as a VAT free transfer of a going concern (TOGC) or part may have been treated as VAT exempt if there is living accommodation above. There are a number of traps to be aware of and it will pay to take advice. Contact me if you would like to discuss any project.
5% VAT on certain types of refurbishment
A reduction of VAT from 20% to 5% on all direct materials (that are integral to the building) and labour used to “refurbish” property will be available whereby property is either:
– an empty property and has been so for 2 or more years
– a building being converted from a commercial unit to residential
– Changing the number of dwellings (up or down in units)
You do not need to be VAT registered to benefit from this VAT reduction. Your suppliers (builders and associated trades) will need to adjust their invoices to show the VAT rate at 5% instead of the usual 20% – this is not a relief you claim retrospectively to paying your builders at 20% VAT but instead they only charge you VAT at 5%
Please note that the 5% VAT is achievable only on conversion works labour and materials) and not professional fees like architects, project management, survey costs etc. The reduction of VAT rate from 20% to 5% cannot be claimed on soft furnishings such as carpets, cushions, bedding etc. Additionally, the VAT rate reduction cannot be applied to freestanding items such as non-integrated fridges, cookers etc. Finally, the reduction of VAT cannot be claimed on items such as TVs, videos or other lifestyle electrical appliances.
Please note that your builder/tradespeople must buy and fit the materials. No VAT may be claimed back by the property investor at any time.
There have been many suppliers and accountants that are unsure about this ruling and may push against it. You can share this email and the link to the section VAT Notice 708: buildings and construction
What items of expenditure are at 5% and standard rates (20%)?
You can also use reduce-rate works within the immediate site of the premises being converted that are in connection with the:
– A means of providing water, power, heat or access;
– A means of providing drainage or security; or
– A provision of means of waste disposal.
– All other services are standard-rated.
For example, you must standard-rate for:
– The installation of goods that are not building materials, such as carpets and fitted bedroom furniture;
– The erection and dismantling of scaffolding;
– The hire of goods;
– Landscaping; and
– The provision of professional services, such as those provided by architects, surveyors, consultants and supervisors.
How do I demonstrate that I can use the 5% VAT scheme?
If you have plans showing the conversion then this is sufficient. Additionally, if the property has been left empty for the past two years then you may need proof from the Local Authority.
Reduce VAT on property development - Can I claim the VAT back altogether?
If you buy a building under commercial terms (such as pubs, retail, offices) and convert the building into residential (flats / HMOs) then the sale of these properties is zero-rated (but not on existing residential properties which are still exempt from VAT), so, if you have a company that develops property and then sells it to another company that you also own, you get a zero-rated sale and can reclaim all the VAT.
The second company then undertakes the exempt rental and it has no input tax costs to be restricted (1)
This does require you to buy and refurbish the property in Company A to reclaim the VAT and then sell the property to company B with a zero-rated sale of residential property. This requires a few things:
Company A is registered to buy and sell properties as a trade.
The property needs to be a commercial property at the point of refurbishment.
There needs to be a change of use from commercial to residential before it is sold to Company B.
Company A needs to own Company B so that there is no stamp duty to be paid on the property.
We are property developers and investors as well as being accountants. We, therefore, know how to reduce our own costs. So, if you call Simon this month only and quote “RVAT Breaks” he will show you how to reduce your costs too.
We have also written a more detailed article all about investing in commercial properties. Be sure to take a read.
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A note for house conversions into a HMO and saving VAT for property investors
A conversion from a single dwelling house to an HMO must meet the below criteria for the 5% VAT reduction to apply.
The work being carried out must result in residential units that meet the following conditions.
– They consist of self-contained living accommodation.
– There is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling.
– The separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision.
– The separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision.
As confirmed by Gary Dodds of HMRC that a house being converted from a house into an HMO may have the VAT reduced from 20% to 5%. It has taken us 2-3 years and 15 attempts to get HMRC to understand their own legislation /terminology to obtain this conclusion.
Converting a commercial property into residential held within a holding company structure
You may decide to buy a commercial building and convert it into residential. There are a number of tax implications being SDLT, VAT and tax on profits made.
The process of buying a commercial building to residential to minimise tax is as follows:
– Set up the holding company as the below shows
– Set up the SPVs that are owned by the holding company (see below)
– Buy the property within one of the buy to flip companies and remove the VAT using the 1614D form or accept that the VAT will have to be paid
– Start the conversion works and ask the builder to charge just 5% on their work (direct labour/materials to do with the conversion works). The builders claim back the VAT on the materials that they buy. The tradespersons(s) therefore buy and fit the materials used
– Claim all the VAT back throughout the process
– Pay the corporation tax within the limited company and transfer the money back up to the holding company
– Close down the limited company using the DS01 form
It is possible to buy a commercial building and have the VAT removed using the 1614D form. This is provided that the commercial building is However many sellers are reluctant to use this form for many reasons.
All VAT may be claimed back on the sale of a building provided that the building has not been used for residential purposes in the last 10 years. If you create an SPV that sells all properties when converting from commercial to residential it becomes a 0% VAT item.
All VAT may then be claimed back during the process of the conversion provided that the SPC will sell all the assets
Stamp Duty Land Tax issues
You could pay a double tax when buying a commercial building. You would pay SDLT on the total cost If you have to pay VAT on the commercial building. A £200,000 building with a VAT of £40,000 would give a total consideration of £240,000. It is this value that would be deemed chargeable for SDLT purposes.
This is why it is beneficial to have the VAT element removed by using the said 1614D form
You would have to pay the standard SDLT banded tax rates if you wanted to move some of the properties owned in the flip company to your own name or an unconnected limited company
The above issue may be mitigated if you transfer assets between companies within a holding company structure. There are no SDLT charges when transferring a property from one company to another in a group. There are some conditions that need to be met and there are times when the SDLT relief may be removed.
Transfer of Going Concern (TOGC) - VAT minimisation on transfer of a commercial business:
In summary, if you sell or buy the freehold of a property that is commercially let to a tenant and this lease remains in place at the sale, a business of property rental is transferred to the purchaser.
This is a business transferred as a TOGC even if the property is only partly tenanted and means any VAT due to be charged at purchase will no longer be necessary. See VAT Notice 700/9 for more information. This is because the sale of the business and its assets under TOGC is “neither a supply of goods nor a supply of services”.
To secure the TOGC VAT benefits the buyer will need to ensure that the situation meets the full conditions required by HMRC. These are:
– the building must be sold as part of the transfer of a ‘business as a ‘going concern’
– the building is to be used by you/your limited company with the intention of carrying on the same kind of ‘business’ as the seller (but not necessarily identical)*1
– where a seller is a taxable person, you/your limited company must be a taxable person already or become one as the result of the transfer by the relevant date (see definition below)
– in respect of land which would be standard rated if it were supplied, you must notify HMRC that you have opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date
– where only part of the ‘business is sold it must be capable of operating separately
– there must not be a series of immediately consecutive transfers of ‘business’
*1 If you intend in due course to carry on a different kind of business using the building purchased, the sale may still be a TOGC if you continue the old business initially.
The test is whether you intend to carry on the business you have bought. This test does not lend itself to a set time-span, because ‘continuation of a business’ can vary between different types of activity.
There are extra rules to determine whether VAT should be charged on the transfer of land and buildings – even if the rest of the transfer does qualify for TOGC treatment.
The additional conditions are:
If the seller is transferring land or buildings:
– on which he has opted to tax or
– which are new (less than three years old) or unfinished buildings or civil engineering works which would ordinarily be standard-rated
– have notified HMRC that you will opt to tax by the relevant date and
– have notified the seller by the relevant date that their election will not be disapplied then
the transfer of the land or buildings can be included in the TOGC.
Please keep in mind for VAT purposes the time of supply (relevant date) is normally the date of the transfer, but will also include the date of receipt of a deposit by the seller.
Where the written notification of the option to tax is sent to HMRC by mail, the notification must be properly addressed, pre-paid and posted on or before the relevant date. Notice 742A Opting to tax land and buildings fully explains the option to tax and the paperwork and deadlines associated with this. In short, you will need to complete form 1614A.
Conditions for the sale of a business to be treated as a TOGC
Where the business being transferred does not contain any land and buildings (for which further conditions may apply as set out below), it must meet the following conditions in order to be treated as a TOGC:
– the supply must be a supply of the assets of the seller’s business (or part of it) as a going concern
– the buyer must use the assets transferred in carrying on the same kind of business as that carried on by the seller
– if the seller is a taxable person, the purchaser must be a taxable person or as a result of the transfer become one, and
– if only part of a business is being transferred, that part must be capable of separate operation
For further details on the conditions for a transfer of a business to be treated as a TOGC for VAT purposes, see Practice Note: VAT—what is a transfer of a business as a going concern?
Additional conditions for a sale of a business involving land and buildings
Where the business being transferred includes land and/or buildings:
– over which the seller has exercised an option to tax (ie an election under the Value Added Tax Act 1994(VATA 1994), Sch 10) to waive the usual exemption for supplies of land, so that future supplies of that land will be standard rated, or
– that are new or uncompleted (falling with paragraph (a) of item 1 of group 1 of VATA 1994, Sch 9)
in addition to the four general conditions for TOGC treatment set out above, the buyer must also (before the time at which the supply of land would otherwise be treated as being made for VAT purposes):
– exercise an option to tax in relation to the same land or buildings and notify the option to tax to HMRC, and
– notify the seller that a particular anti-avoidance rule will not apply to it, which it will be able to do if:
– – the land or buildings being transferred will not fall under the capital goods scheme in the hands of the buyer, and
– – its option to tax will not be disapplied as a result of it being a developer of exempt land
If these additional conditions are met, the land and buildings are also treated as part of the TOGC.
If the additional conditions are not met, the land and buildings are not treated as part of the TOGC and therefore VAT must be charged at the appropriate rate on the transfer of the land and buildings. The transfer of the remaining assets can still be treated as a TOGC if the general conditions are met.
For more information on the rules that apply where the assets that are transferred include land and buildings, see Practice Note: Transfers of a going concern involving land and buildings.
Consequences of the transfer of a business being a TOGC - The buyer
If the transfer of a business meets the conditions to be a TOGC, the buyer:
– will not pay any VAT on the acquisition of the assets
– if it is not already registered for VAT, may:
– – be required to take into account the supplies made by the seller in the course of the transferred business in assessing whether it is required to register for VAT
– – apply, jointly with the seller, for the seller’s VAT registration to be transferred to it (in which case the VAT records will be transferred to the buyer unless the seller applies and HMRC allows the seller to keep the records)
– is entitled to access the VAT records of the business transferred that are maintained in the hands of the seller
– must step into the position of the seller with respect to any assets that are subject to the capital goods scheme and make any necessary adjustments under that scheme
– may be able to recover input VAT on costs associated with the transfer depending on the extent to which the buyer puts the assets acquired to use in making taxable supplies
Consequences of the transfer of a business being a TOGC - The seller
If the transfer of a business meets the conditions to be a TOGC, the seller:
– must not charge VAT on the transfer of the assets
– must maintain the historical VAT records of the transferred business and make them available to the buyer, unless the buyer and seller agree that the buyer will take on the seller’s VAT registration number (which is very rare)
– may be required to deregister for VAT if is no longer making any taxable supplies, and
– may be able to recover input VAT on costs associated with the transfer on the basis that the costs are a general overhead
Option to Tax a commercial building
Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.
But you can opt to tax land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. When you opt to tax, you can specify an area of land or a ‘building’.
Commonly, you will specify a ‘building’ because that is the prominent feature of the land. If you specify:
– a building, the option to tax will continue to apply to the land on which the building stood if the building is demolished and to any future buildings constructed on the land
– land, the option will apply to any buildings on the land and future buildings constructed on the land
You do not need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard-rated, and you will normally be able to recover any VAT you incur in making those supplies.
The advantages of opting to tax a commercial building or land
– Being able to recover any VAT paid out on running/refurbing the building/business
– Being able to recover any VAT paid on the purchase of the building (where the building is worth more than £250,000 then this reclaim will be through the Capital Goods Scheme).
– Not paying back any VAT at property sale if you have recovered the purchase VAT (through the Capital Goods Scheme) you paid when originally buying it.
– Being able to sell the business (if commercial tenants are in place for example) using Transfer of a Going Concern enables the new purchaser not to pay VAT on its purchase
The disadvantages of opting to tax a commercial building or land
– VAT must be charged on the sale or rental of an opted building/land even though the buyer/tenant cannot necessarily recover this VAT.
– If you are selling the building and are have claimed back the purchase VAT through the Capital Goods Scheme you may be liable to pay back the VAT reclaim for the period between when you sell the asset and when you would have completed the CGS (normally 10 years after purchase).
Where you are purchasing Land or buildings which has an option of tax on it, you can issue a VAT1614D to the vendor. This is an application to disapply of the option to tax on the building where the purchaser intends to use the building or land as a dwelling or intends to convert the building with a view of it being used as a dwelling or relevant residential use.