I still dream of living in a beautifully renovated home, so I’m pleased that Sarah has invited me to blog for Renovate Me, so that I can discuss VAT issues for those of you considering renovating, restoring or converting property.
Because VAT is a transaction tax, i.e. a tax on sales and purchases of goods and services, it’s important to understand the rules before you start spending money on that dream project, or you could end up with a big VAT shaped hole in your budget a few months later.
If you’re not familiar with VAT, it can be easy to make mistakes. I’ve also seen many situations when even experienced property developers have ended up with unexpected VAT bills because they haven’t invested time researching the VAT issues in advance, although they’ve clearly spent hours and hours researching the fixtures and fittings!
How do you work out how much VAT you have to pay?
Always assume that you have to pay VAT on all costs, so start off with the worst case scenario. Then we can go on to consider the two ways of saving VAT on refurbishments and conversions:
- first, certain refurbishment or conversion work are eligible for the reduced rate of 5%;
- second; in some cases you may also be able to claim the VAT you’ve paid from HMRC.
So the “VAT cost” of a project is the difference between the VAT you pay on your costs, and the VAT you can claim from HMRC.
The main reason that dealing with VAT can be difficult is because the rules are different depending upon the physical characteristics of a property, the circumstances of the property leading up to the purchase and your intention for what happens to the property once works have been completed – all affect whether or not your contractor charges VAT at 20% or 5%. There may also be a clause in the planning permission that affects whether you can claim VAT on costs from HMRC. You also have to consider the property’s existing use and how this will change after the renovation or conversion.
The three important factors
The VAT cost of any property development depends on three main factors:
- the nature of the existing property and how the finished property will be used; eg whether it will be sold or leased, and whether it’s for residential or commercial use;
- whether the construction work; i.e. renovation, conversion, extension etc is liable to VAT at 20% or qualifies for the reduced rate of 5% (or even 0% for certain new construction); and
- how much of the VAT you can claim from HMRC; whether as a commercial developer or for your personal/family use.
I’ll be talking about each of these issues over the next few months with special reference to renovations and conversions.
How much help can I get from HMRC?
You can find the detailed rules in HMRC’s VAT Notice 708: buildings and construction. You can also ask for help from the HMRC VAT helpline and the officers will do their best, but they will not be able to advise.
It’s a good idea to research the subject before you start spending money. Although investing in professional VAT advice could be a cost you are trying to avoid, it could ultimately save you a fortune in VAT when you fully understand how the rules apply to your particular project; to identify potential VAT savings and avoid unexpected costs or hassle dealing with HMRC. You’ll be spending a lot of money on architects, surveyors, accountants and solicitors among others, so please consider the VAT before thinking about digging a hole in the ground or knocking down a couple of walls.
I have written a book about the subject: “VATWoman’s Guide to residential property development” for those of you wanting detailed information about the subject. In the meantime, I’ll be discussing some of the most important issues with some case studies over the next few months to give you a flavour of how the rules work.