Posted by Simon Misiewicz on 15th May 2013
Reduce VAT on property development
Are you carrying out refurbishment works on your investment properties?
Are you paying more tax than you should be?
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)
HMRC Reference: Notice 708 – Section 7 (4)
There are many property investors / landlords that are simply paying more VAT than they need to. Equally trades people are submitting quotes that are being rejected because they are too expensive.
Why is this the case?
Simply put many people do not actually realise that there are different VAT schemes that allow trades people to reduce their VAT on sales invoices. As such they can therefore reduce their overall costs and win more business. Equally property investors and landlords can reduce their refurbishment and development costs. This is a classic legal win / win for both parties. The VAT on certain projects can be reduced from 20% to just 5% (1) (3).
What types of developments does this include?
Conversion of non-residential into residential buildings.
Change in the number of “dwellings” such as a house in to multiple occupancy (flats / HMOs).
Renovating residential accommodation that’s been empty for more than two years.
A more detailed view of conversions (4)
A qualifying conversion includes the conversion of:
- A property that has never been lived in, such as an office block or a barn.
- A multiple occupancy building such as a bedsit block.
- Living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained.
- Any dwelling which had previously been adapted in its entirety to another use, such as to offices or a dental practice.
It does not include:
- The creation of living accommodation that is not a single household dwelling, such as most granny annexes or additional bedrooms at a care home.
- The renovation or alteration of living accommodation that had been used for other purposes without the premises being adapted, such as a flat above a shop that has been used for storage. If the living accommodation has not been lived in for two years or more, the reduced rate explained in section 8 may apply.
Please make sure that any materials are supplied by the trades people / companies. If you buy materials yourself then you are liable to pay the full 20% VAT rate on purchase (1) (2) (3)
What items of expenditure are at 5% and standard rates (20%)? (4)
You can also use reduce-rate works within the immediate site of the premises being converted that are in connection with the:
- means of providing water, power, heat or access;
- means of providing drainage or security; or
- 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 a 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.
A note for house conversions into a HMO
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 a 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.
For more information please contact us on 0115 946 1991 or Click Here To Email