Whether you’re planning a new property development or some sort of residential conversion, you probably already know that the VAT issues are quite difficult. Although the main principles seem simple, the rules are far more complicated than they appear at first glance because the VAT law includes so many detailed provisions. For example, there are different definition of the words “dwelling” and “conversion” according to the situation and they can affect the VAT profile of your development.
What does this mean? Well, the actual “VAT cost” of your development depends on how much VAT you pay on goods and services and how much VAT you can claim from HMRC. The VAT rules include specific definitions that affect how much money you need to pay contractors and suppliers during the course of the development and how much VAT you can claim from HMRC.
And this affects how much money you need to fund the development right from the start, as I’ll explain below.
Saving VAT on property development
Under basic principles, there are two ways to save VAT:
• New residential construction is usually zero-rated while certain residential conversions and renovations may qualify for the reduced rate of 5%
• In certain cases, commercial developers and DIY builders/converters may be able to claim VAT from HMRC.
The key is understanding which rules apply in which situation and how the rules work together so that you can plan how much VAT you need to include in your budget for costs and how much VAT you can claim from HMRC.
So where do the different definitions of “dwelling” and “conversion” come in to all of this?
If you’re developing new residential property, whether to sell or rent; or building your own home, you benefit from the best VAT savings, because the zero-rate applies to most contractor’s services and you may be able to claim VAT on other costs from HMRC. Your “VAT cost” should be relatively low.
These provisions are relatively simple because the same definitions apply for both types of relief.
This is where calculating your VAT cost can be more complicated, because different definitions apply to the two types of relief.
Consider the best case scenario that applies if you’re converting a commercial property into dwellings to sell, or you’re converting an existing commercial property for your family home. In this case, the contractor’s services may qualify for the 5% rate AND you may be able to claim VAT on the costs from HMRC. As with new construction, this means that your “VAT costs” should be relatively low.
But it’s not quite that simple, because of the meaning of the word “conversion”.
The best way to explain is to consider one of the most popular types of conversions; i.e. buying up old pubs or barns and converting them into homes, either to sell or to live in.
Suppose you’re converting a pub which has some living accommodation to create a self-contained dwelling. In this case, some or all of the contractor’s services may qualify for the 5% reduced rate, whether or not the existing living accommodation is self-contained.
So if you pay a contractor £100,000 net of VAT, instead of paying 20%; i.e. £20,000, your VAT bill could be as little as £5,000. This means that your potential saving is anything up to £15,000, which reduces your funding requirements or frees up more money for other work.
But you can’t claim VAT on costs if the living accommodation was ever “used as a dwelling” even if it wasn’t self-contained. This means that you wouldn’t be able to claim the £5,000 VAT paid to the contractor, so your VAT cost in this case would be at least £5,000.
And that’s only part of the picture because if you’re converting to sell or lease, your conversion must meet several detailed criteria to claim VAT on your costs. For example, what does “used as a dwelling” actually mean? Does it include staff accommodation? And how does it apply if someone has lived in a property, such as a barn, intermittently or for a short period of time before it’s been converted?
The information is available in HMRC’s VAT Notice 708 “Buildings and construction” and a couple of other notices. But the rules are complicated and you need to pay careful attention to the details and understand how the different rules work apply to your development to make sure that you include the right amount of money in your budget to cover your VAT costs.
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