Are you working on property projects but wish to reduce your Value Added Tax when buying and refinishing a property investment?
Whilst you are reading this article you may wish to read our page on the subject of “buy to let tax for UK landlords” where we discuss all the different types of tax that you need to be aware of. Read Here for more (opens in a new tab)
1614D form to remove the Value Added Tax costs when buying commercial buildings
There are going to be times when you look to buy a commercial building and convert it into residential dwellings. The sad fact is that you may have to pay 20% Value Added Tax but you may not be made aware of this until you start the purchase process. The reason for this is that many companies assume that you know value Added Tax will be charged and that you will claim it back.
As such you will need to ask the seller to complete a 1614D form to disapply VAT from commercial buildings. That way they do not charge you Value Added Tax (VAT) at all on the sale.
Value Added Tax reduction from 20% to 5% on different types of property investment
Would you like to know which categories of spend you are able to reduce Value Added Tax on?
There are many people who are illegally reducing Value Added Tax and claiming VAT back, many of whom have not intentionally broken the law but illegal is illegal no matter what knowledge people have. I am sure you do not want the VAT man knocking on your door because you have done something like this!
There are also many property investors who are needlessly registering for Value Added Tax when they cannot claim it back. You cannot claim back Value Added Tax on any residential property business activities that are not services related such as lettings/estate agents, conveyancing, etc. The business activity of selling or renting out residential properties is not VAT-able. This means you cannot claim back VAT, whatsoever.
I have previously written a number of articles about how to reduce Value Added Tax on a House in Multiple Occupation (HMO), properties that have been empty for more than two years and property conversions from commercial properties to residential.
Properties that have been empty for more than two years
Be sure to get proof from a local authority that the investment property has been empty for more than two years. This will help you prove to HMRC that the property has been empty to meet HMRC’s criteria. This means that the builder can invoice for the labour and materials at 5% Value Added Tax rate rather than the standard 20% Value Added Tax rate.
It is easy to see properties that have been empty for more than two years. These houses are typically boarded up and visibly in desperate need for refurbishment. You can contact your local authority to obtain a list of empty properties in your area.
A note for conversions from single lets into an HMO
The work being carried out must result in residential units that meet the following conditions.
- 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 commercial property to residential
VAT notice 708 also shows us that VAT may be reduced when converting a non-residential building into a residential dwelling. The VAT rate is reduced from 20% to 5% on all direct labour and materials of the conversion works excluding professional fees. Non-residential buildings include residential buildings that have not been lived in for at least ten years
The exception to this rule is where the non-residential building has been used as a residential dwelling in any part of the previous 10 years. Please note that converting a garage will not meet the conversion requirement as it will be part of a residential dwelling.
Download your buy to let tax guide here, written by our property accountants
On what costs can you reduce VAT from 20% to 5%?
– Construction materials and labour costs of the building
– means of providing water, power, heat or access (including putting in new services)
– means of providing drainage or security
– provision of means of waste disposal
– conversion of an outbuilding into a garage
– construction of a new detached garage
– the construction of a drive serving the garage
– Energy efficient/saving materials
What costs cannot be reduced and must remain at the 20% level?
– 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 (skips, tools, etc)
– the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors