Reducing Your VAT On Property Development

Simon Misiewicz

Expat & Property Tax Specialist

15th May 2013

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 critical criteria to note are as follows:

 Scenario 1:

– it’s built from scratch, and, before construction starts, any pre-existing building is demolished to ground level (cellars, basements and the ‘slab’ at ground level may be retained) – see paragraph 3.2.3

– the new building uses no more than a single facade (or a double facade on a corner site) of a pre-existing structure. The pre-existing building is demolished (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

Scenario 2:

An existing building is enlarged or extended, and the enlargement or extension creates an additional dwelling or dwellings

Scenario 3

An annexe to an existing building is built

Scenario 4:

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%

Many organisations will not charge you at the 0% VAT rate. This is why it is essential to register for VAT using the VAT 1 form and opt the building to tax using the 1614A form 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, 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 shown above occurs within 6 years, then HMRC may claw back the VAT.

Example of clawback

A construction company that was previously fully taxable builds a residential property to sell 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 made an exempt supply of a lease. As such, VAT previously claimed needs to be repaid under the ‘clawback’ provisions. The company still intends to make a taxable sale of the property. The input tax would 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.

Reducing your VAT On Property Development is essential to financial control and tax planning, which our property development accountants support.

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 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 purchasing 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 your purchase price. 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 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 the building under the “Capital Goods Scheme” for you to benefit from the 1614D. They will likely be very reluctant to accept the 1614D; however, if they sell the building within 10 years of using the capital goods scheme due to the VAT, they will have to pay it back. It will then be your decision whether you proceed with the purchase and pay the VAT or choose not to purchase the property.

In all instances, you must secure the signing of the 1614D very early in the sale negotiations – this is not a relief you can secure retrospectively after purchase. Our property accountants work hard in reducing your VAT On Property Development projects

Property Conversions

When you convert a property not currently used for residential purposes – such as a barn or a pub, the VAT rules are more complicated. Your sale may be exempt, zero-rated, or a mixture of the two, depending on 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 must persuade them about 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 several 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.

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.

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